Economic Policy Uncertainty and Corporate Leverage Ratio: Evidence in China

Abstract

In the context of the current unstable macroeconomic environment, we explored the impact of economic policy uncertainty on the corporate leverage ratio. The study found that economic policy uncertainty significantly reduces firm leverage ratios. This relationship holds significantly after a series of robustness tests, supporting the point of risk aversion among corporate executives. Meanwhile, we found that firms are more inclined to reduce their short-term debt levels since short-term debts induce a greater liquidity risk for firms. Furthermore, we found that economic policy uncertainty affects firms' behavior of reducing their leverage ratio mainly in non-state-owned enterprises and firms not audited by the Big Four auditors. This paper has a certain reference significance for the enterprise's risk-related decision-making under the current macroeconomic environment.