Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies

Abstract Economic policy uncertainty (EPU) refers to uncertain economic events that can hamper the transparent flow of different economic activities. Given that, this study tends to explore the association between EPU and corporate financing structure, including primary and secondary sources of financing. For regression analysis, we analyze the 55,200 firm-level observations from six economies of Asia spanning 2007–2016 and employ the 2-step system GMM (generalized method of moments). The statistical results imply that EPU has a negative impact on debt financing while it has a positive relationship with equity financing. Referring to secondary sources of financing, EPU negatively impinges upon account payables whilst positively related with financing through account receivables. Such spatial effects are robust across alternative measurements of EPU and control of endogeneity. The adverse impact of EPU can be explained by credit risk for banks and limited trade credit opportunities that shift financing preferences towards equity and account receivables. This study concludes that the industrial sector faces dynamic financing trends with exposure to policy uncertainty. It recommends direct policy guidance to policy officials that they should focus on enhancing policy stability because policy volatility can deter some financing options that may become useful in certain situations. This study is innovative by exploring the role of EPU in determining both primary and secondary structures of financing.