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Economic policy uncertainty and default risk: Evidence from China

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  • Lu, Chao
  • Yang, Meng
  • Xia, Xiaoxue

Abstract

Against the backdrop of high leverage and indebtedness worldwide, the prevention of corporate default and systemic financial risk has received growing attention from academics and practitioners. Using a sample of Chinese A-share listed firms on the Shanghai and Shenzhen stock exchanges from 2010 to 2019, this study empirically examines the impact of economic policy uncertainty on default risk and its underlying mechanism. We find that economic policy uncertainty significantly increases default risk. This finding remains valid after a series of endogeneity and robustness tests, including instrumental variable methods. The results of the mechanism test show that good corporate operational capabilities, a high level of corporate internal governance, and effective external monitoring mechanisms can mitigate the impact of the economic policy uncertainty on default risk. This study enriches the research on economic policy uncertainty and default risk while also providing new insights to curb the further rise of corporate default risk from an external macro perspective.

Suggested Citation

  • Lu, Chao & Yang, Meng & Xia, Xiaoxue, 2023. "Economic policy uncertainty and default risk: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 821-836.
    • Handle: RePEc:eee:ecanpo:v:79:y:2023:i:c:p:821-836
    DOI: 10.1016/j.eap.2023.06.028
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