Tariff Uncertainty and Cost of Debt

55 Pages Posted: 15 Apr 2022 Last revised: 16 May 2022

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Yuxi Wang

Shanghai Jiao Tong University - Antai College of Economics and Management

Date Written: April 4, 2022

Abstract

We examine the causal effect of tariff uncertainty on firms’ cost of debt. Our tests exploit a unique trade policy that reduces tariff uncertainty on Chinese imports without affecting the actual tariff rate: the U.S.-China Permanent Normal Trade Relations (PNTR). We find a significant drop in the loan spreads for firms affected by PNTR relative to other firms. We further show that such effects are through the channel of increasing firms’ performance predictability. Overall, based on a clean measure of uncertainty from the tariff source, we provide evidence that reducing uncertainty has a causal effect on reducing cost of debt.

Keywords: cost of debt, bank loans, performance predictability, Permanent Normal Trade Relation, tariff uncertainty

Suggested Citation

Gao, Huasheng and Wang, Yuxi, Tariff Uncertainty and Cost of Debt (April 4, 2022). Available at SSRN: https://ssrn.com/abstract=4074265. or http://dx.doi.org/10.2139/ssrn.4074265

Huasheng Gao

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Yuxi Wang (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

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