Tariff Uncertainty and Cost of Debt
55 Pages Posted: 15 Apr 2022 Last revised: 16 May 2022
Date Written: April 4, 2022
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
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