Economic policy uncertainty and cost of debt financing: International evidence

Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms' debt financing cost is less affected by economic policy uncertainty.

Automated summary

The study shows that economic policy uncertainty positively affects the cost of debt financing, with a stronger impact during the global financial crisis from 2008 to 2009. Additionally, the research findings indicate that large firms' debt financing costs are less affected by economic policy uncertainty.