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Economic Policy Uncertainty, National Culture, and Corporate Debt Financing

Author

Listed:
  • Bilal Haider Subhani

    (School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China)

  • Umar Farooq

    (School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China)

  • M. Ishaq Bhatti

    (La Trobe Business School, La Trobe University, Melbourne, VIC 3083, Australia)

  • Muhammad Asif Khan

    (Department of Business Management, University of Johannesburg, Johannesburg 2092, South Africa
    Department of Commerce, University of Kotli Azad Jammu and Kashmir, Muzaffarabad 11100, Pakistan)

Abstract

Financial innovation vis-à-vis economic policy uncertainty (EPU) without due regards being given to debt financing. This paper fills this gap and unveils the dynamic role of national culture in defining debt financing via EPU. We use a sample of 3831 non-financial firms of Asian economies and employ the System Generalized Method of Moments to estimate the regression coefficients. Our findings reveal an inverse relationship between the EPU and debt financing, which suggests that debt finance mitigation strategies are successfully executed in the region. The potential reasons for this include the policies by businesses to reduce business activities and avoid the unfavorable rising financing cost through EPU. On the supply side, the rising EPU induces the banks to accelerate their interest rate due to increased default risk. Similarly, we observe that high uncertainty avoidance (UND) has a negative and significant link with debt financing due to an unpleasant behavior of corporate managers towards debt when they have an alternate source of financing instruments instead of accepting long-term obligations. However, we find that the UND and EPU interaction has a significantly positive impact on debt financing due to the rigid behavior of managers, which forces them to consider cultural traits and converts their risk-averse attitude into risk-friendly behavior. This implies that corporate managers should reflect the sensitivity of the national culture while considering debt financing.

Suggested Citation

  • Bilal Haider Subhani & Umar Farooq & M. Ishaq Bhatti & Muhammad Asif Khan, 2021. "Economic Policy Uncertainty, National Culture, and Corporate Debt Financing," Sustainability, MDPI, vol. 13(20), pages 1-15, October.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:20:p:11179-:d:653188
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