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Uncertainty, Shock Prices and Debt Structure: Evidence from the U.S.-China Trade War

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Abstract

Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.

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  • Ali Ozdagli & Jianlin Wang, 2022. "Uncertainty, Shock Prices and Debt Structure: Evidence from the U.S.-China Trade War," Working Papers 2212, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:94665
    DOI: 10.24149/wp2212
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    References listed on IDEAS

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    1. Ryan Banerjee & Boris Hofmann, 2022. "Corporate zombies: anatomy and life cycle," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 37(112), pages 757-803.
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    More about this item

    Keywords

    Policy uncertainty; asset prices; debt structure; zombie firms; trade war;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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