Uncertainty, Stock Prices, and Debt Structure

70 Pages Posted: 18 Nov 2021 Last revised: 19 Apr 2024

See all articles by Ali K. Ozdagli

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Dallas

Jianlin Wang

Leavey School of Business, Santa Clara University

Date Written: March 6, 2024

Abstract

We show that greater economic policy uncertainty (EPU) leads to lower stock prices overall. Higher bank debt reduces the stock price sensitivity to EPU whereas non-bank debt does not have a similar effect. The mitigating effect of bank debt is concentrated among firms experiencing cash-flow insolvency. These results are supported by the news-based policy uncertainty index, by 2018-2019 U.S.-China trade policy uncertainty period, and by monetary-policy-related uncertainty as well. Our results suggest that bank debt can provide insurance and flexibility for shareholders of distressed firms, especially during turbulent times.

Keywords: Policy uncertainty; trade war; asset prices; debt structure

JEL Classification: E44, F13, G12, G20, G30

Suggested Citation

Ozdagli, Ali K. and Wang, Jianlin, Uncertainty, Stock Prices, and Debt Structure (March 6, 2024). Available at SSRN: https://ssrn.com/abstract=3964413 or http://dx.doi.org/10.2139/ssrn.3964413

Ali K. Ozdagli (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Jianlin Wang

Leavey School of Business, Santa Clara University ( email )

Leavey School of Business
500 El Camino Real
Santa Clara, CA CA 95053
United States

HOME PAGE: http://https://www.jianlinwang.org

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