Policy uncertainty and the capital shortfall of global financial firms |
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Institution: | 1. Business School, Beijing Wuzi University, #321 Fuhe Street, Tongzhou District, Beijing 101149, China;2. Faculty of Economics, Kyushu University, 6-19-1, Hakozaki, Higashiku, Fukuoka 812-8581, Japan;3. School of Management, China University of Mining and Technology, No.1, Daxue Road, Xuzhou, Jiangsu 221116, China |
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Abstract: | This paper examines how economic policy uncertainty affects financial firms' capital shortages in the event of a new crisis. By employing a global economic policy uncertainty index, we show that an increase in policy uncertainty leads to future capital shortfall increases in the event of a severe market decline. This effect of policy uncertainty is of a similar magnitude for all firms across all regions and sectors, albeit with a few exceptions. As expected, well-capitalized financial firms are less affected. Our findings have important implications for policymakers and politicians, since if their response during a severe market decline is not timely and decisive, the delay will come at a cost. Further, in terms of the implications for firms' managers, we show that during periods of elevated policy uncertainty and a severe market downturn, firms will face additional, unexpected capital requirements. |
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