State Ownership in Economic Policy Uncertainty: The Role of Leverage

Abstract

This paper investigates the impact of state ownership on exposure of Chinese firms to economic policy uncertainty (EPU). We present strong and robust evidence that firm-level economic policy uncertainty exposure is positively related to proportion of state ownership. Furthermore, we identify debt financing as the primary channel through which state ownership exposes firms to EPU. Specifically, a higher percentage of state ownership leads to higher leverage which, in turn, increases EPU exposure. Our results withstand a set of rigorous robustness checks, effectively addressing potential biases arising from omitted variables and reverse causality.

Keywords: Economic policy uncertainty, State ownership, Leverage