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| Economic Policy Uncertainty and Firm Leverage in China |
| GONG Rukai, XUYuexing, WANGDazhong
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Glorious Sun School of Business and Management, Donghua University;
Business School, Sun Yat-sen University |
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Abstract With the Chinese economy entering a “new normal” and undergoing transformation, the scale of debt and potential risks have increased rapidly. The central government has paid close attention to this. At the Central Working Conference in 2015, “de-leverage” was listed as one of the five major tasks of supply-side structural reform. How to de-leverage has become a focus of attention and discussion in all sectors of society. Studies mainly focus on the factual changes in corporate leverage and less on the logic behind these changes. Considering that China is in the process of transforming from a planned economy to a socialist market-oriented economy, the government may still intervene through various economic policies. Frequent economic policy changes may increase the uncertainty of economic policies. Economic policy uncertainty is an important source of external environmental uncertainty that enterprises in transition economies face and may affect corporate financing decisions. This issue is worthy of more attention and in-depth study in China, which is undergoing an economic transformation.
We link economic policy uncertainty from the macro perspective to micro-level corporate financing decisions. We also explore the logic behind the change in the leverage of enterprises in transitional China from the new perspective of policy uncertainty. First, we use the quarterly data of listed companies from 2002 to 2016 to describe the empirical facts of structural changes in corporate leverage and carry out the corresponding literature review and theoretical analysis. We then use China’s economic policy as constructed by Baker et al. (2016) to empirically analyze the relationship between policy uncertainty and corporate leverage. The main results show that the higher the uncertainty of economic policy is, the lower the leverage ratio of enterprises is. For every 1% increase in economic policy uncertainty indicators, the average leverage of firms decreases by 0.03 to 0.07 percentage points. This negative effect has obvious structural characteristics, which are even more significant in the samples of short-term debt ratios, private enterprises, small scales, and manufacturing companies. Furthermore, considering the economic transformation background of the region in which an enterprise is located, the model is extended and analyzed. We find that the negative effect of policy uncertainty on the leverage ratio of enterprises decreases significantly as the regional marketization level, the gradual advancement of the privatization reform, and the degree of openness increase. The above conclusions demonstrate strong robustness when examining endogeneity problems, replacing key variables, and setting various models.
We mainly extend the literature in two aspects. First, we explore the logic behind the change in the leverage ratio of Chinese enterprises from the new perspective of policy uncertainty andenhance the research on the interaction between macroeconomic policies and micro-enterprise financing behaviors. However, we do not focus on a specific economic policy, but on the perspective of the uncertainty of the overall economic policy, and further expand the literature on existing policy evaluation. Second, using the quarterly data of Chinese listed companies provides comprehensive and meticulous empirical evidence for the impact of economic policy uncertainty on corporate financing behavior. This is especially true for examining a series of reform variables, such as marketization, property rights reform, and opening up, in the process of economic transformation.
Our conclusions have direct policy implications. First, in implementing the de-leveraging policy, it is necessary to clarify the structural and time-varying characteristics of leverage, to fully recognize the impact of policy uncertainty on the polarization of corporate leverage, and to prevent the development of a “one-size-fits-all” de-leveraging policy. Second, reducing or mitigating the negative impacts of government intervention and policy uncertainty on corporate financing decisions relies on the further reform of China’s economic system.
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Received: 15 December 2017
Published: 24 October 2019
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