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Does uncertainty influence the leverage-investment association in Chinese firms?

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  • Arif Khan, Muhammad
  • Qin, Xuezhi
  • Jebran, Khalil

Abstract

This study investigates the effects of firm-specific, market-based, CAPM-based, and economic policy uncertainty on the relationship between leverage and investment for firms of different nature, i.e., state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs). The study uses a panel of Chinese listed firms covering the period 1999–2016 and applies a robust two-step system Generalized Method of Moments technique to cope with the endogeneity problem. The findings show that leverage has a significant and adverse impact on non-SOEs investment behavior. The results further show that firm-specific and market uncertainties exacerbate the negative effect of leverage on investment for non-SOEs. However, economic policy uncertainty and CAPM-based uncertainty attenuate the association between leverage and investment for SOEs and non-SOEs, respectively. Overall the results suggest that the impact of leverage on investment can be mitigating or exacerbating depending on the underlying uncertainty and the nature of the enterprise.

Suggested Citation

  • Arif Khan, Muhammad & Qin, Xuezhi & Jebran, Khalil, 2019. "Does uncertainty influence the leverage-investment association in Chinese firms?," Research in International Business and Finance, Elsevier, vol. 50(C), pages 134-152.
    • Handle: RePEc:eee:riibaf:v:50:y:2019:i:c:p:134-152
    DOI: 10.1016/j.ribaf.2019.04.006
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    Cited by:

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    3. Bajaj, Yukti & Kashiramka, Smita & Singh, Shveta, 2021. "Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy," International Review of Financial Analysis, Elsevier, vol. 77(C).
    4. Muhammad Arif Khan & Xuezhi Qin & Khalil Jebran & Abdul Rashid, 2020. "The Sensitivity of Firms’ Investment to Uncertainty and Cash Flow: Evidence From Listed State-Owned Enterprises and Non-State-Owned Enterprises in China," SAGE Open, , vol. 10(1), pages 21582440209, January.
    5. Klayme, Tania & Gokmenoglu, Korhan K. & Rustamov, Bezhan, 2023. "Economic policy uncertainty, COVID-19 and corporate investment: Evidence from the gold mining industry," Resources Policy, Elsevier, vol. 85(PA).
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    7. Muhammad Arif Khan & Xuezhi Qin & Khalil Jebran, 2020. "Uncertainty and leverage nexus: does trade credit matter?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(3), pages 355-389, September.
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    More about this item

    Keywords

    Investment; Uncertainty; Leverage; State-owned enterprises; Non-state-owned enterprises; China;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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