Economic Policy Uncertainty, State Ownership, and Credit Allocation

Abstract

Employing the news-based economic policy uncertainty (EPU) Index of Baker, Bloom, and Davis (2016) and quarterly data of Chinese listed companies, we find that an increase in EPU raises the average debt-to-asset ratio of state-owned enterprises (SOEs) but lowers that of private-owned enterprises (POEs). Further evidence supports the view that in reaction to a heightened EPU, banks tend to allocate credit resources toward firms with implicit guarantees against default. Our findings highlight that EPU can reduce real efficiency through worsening credit misallocation.

Keywords: Economic policy uncertainty; State ownership; Credit allocation; Corporate leverage

JEL Classification: G32; E44; P26