Economic Policy Uncertainty, Corporate Leverage And Firm Investment: Evidence From Chinese Firms

Abstract

We investigated the effect of economic policy uncertainty on the company leverage ratio in the current unstable macroeconomic climate. Firm leverage ratios are shown to be considerably reduced by economic policy uncertainty, according to the study. Many robustness tests show that this link persists strongly, confirming corporate leaders' aversion to risk. As a result of the increased liquidity risk that comes with short-term debt, we discovered that businesses are more likely to cut their levels of it. Additionally, we discovered that firms' conduct in lowering their leverage ratio is influenced by economic policy uncertainty, particularly in non-state-owned businesses and those that are not audited by the Big Four auditors. This study pertains to the decision-making process of the firm about risk in the context of the macroeconomic environment