Journal of Corporate Finance Vol. 62 2020
Policy uncertainty and the capital shortfall of global financial firms
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.
- DOI
- 10.1016/j.jcorpfin.2020.101558
- Volume
- 62
- Pages
- 101558
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref