Firm-level perception of uncertainty and corporate default risk: Evidence from China’s listed firms

This study examines the effect of firm-level perceptions of economic policy uncertainty (EPU) on corporate default risk, using a novel text-based EPU measure constructed from Management Discussion and Analysis (MD&A) sections of annual reports of Chinese A-share listed firms from 2007 to 2020. We document a robust negative association between perceived EPU and default risk. Firms facing elevated EPU adopt conservative financial strategies, reducing bond issuance and long-term debt, increasing cash reserves and diversification, and scaling back capital expenditures while maintaining R&D investment. This effect is stronger in non-state-owned enterprises and firms with greater managerial incentives but weaker under tighter financing constraints. These findlings are robust to alternative specifications and endogeneity controls, these findings elucidate how managerial perceptions shape corporate responses to policy uncertainty, enriching the literature on EPU and corporate financial strategy.