Do Economic Policy Uncertainty Increase Corporate Bond Financing Costs?

With the intensification of macroeconomic fluctuations and the decline in the predictability of government behavior,in recent years,economic policy uncertainty has received particular attention in the academic community.Existing research shows that economic policy uncertainty has a huge impact,which not only exacerbating recessions and economic fluctuations,but also has a significant impact on the financial system and micro-enterprises.On the other hand,the report of the 19 th National Congress of the Communist Party of China put forward requirements for direct financing and capital market construction.No matter from the perspective of stock or increment,the financing scale of credit bonds issued by Chinese enterprises far exceeds the scale of domestic stock.The bond market has become an important direct financing venue for enterprises.Among them,corporate bonds have become the largest variety of corporate medium and long-term credit bond financing.At the same time,a battle to reduce the financing costs of entity enterprises,especially private enterprises,has been launched.In this context,by reading and combing the literature,I found that existing research does not provide sufficient evidence on how and through which channels economic policy uncertainty affects bond financing costs.Based on this,this research uses a combination of normative analysis and empirical analysis,citing the economic policy uncertainty index constructed by Baker et al.(2016),and selects corporate bonds listed on the Shanghai or Shenzhen Exchange from 2007 to 2018 as samples to study the relationship between economic policy uncertainty and bond financing costs.Combined with chairman Xi's important expositions on private enterprises,the difference between bond financing costs of private enterprises and non-private enterprises in the face of economic policy uncertainty was examined.At the same time,this research uses the SA index of Hadlock & Pierce(2010)to measure the degree of corporate financing constraints.With reference to Yuhui Wu and Shinong Wu(2017),this research use whether audited by the big four accounting firms as proxy of information quality.The role of financing constraints and information quality in the economic policy uncertainty affecting bond financing costs are considered.After that,this research discusses the possible endogeneity problems,and adopts methods such as the first order lag of the economic policy uncertainty index and the instrumental variable estimation to overcome them.This thesis also conducted a series of robustness tests,including replacing the explanatory variables,re-evaluating economic policy uncertainty in two other ways,and citing China economic policy uncertainty index based on various Chinese mainland newspapers from Yun and Paul(2019).After theoretical analysis and empirical testing,this thesis finds that: First,increased economic policy uncertainty will increase risk size and risk price,leading to an increase in risk premium.At the same time,in incomplete markets,it will lead to increased frictions such as information asymmetry and financing constraints,which will increase the company's bond financing costs.Second,in the face of economic policy uncertainty,private enterprises are at a disadvantage in terms of financing,scale,and information,and the impact of economic policy uncertainty on private enterprises is more significant.Further research finds that the more severe the financing constraints are,the more the bond financing costs increase;the higher quality of the information,the less influence of economic policy uncertainty on the bond financing costs.After endogeneity discussions and robustness tests,the conclusions of this thesis are robust.Based on the conclusions of our study,this thesis puts forward policy recommendations from two perspectives: government and enterprises.This thesis enriches the research on economic policy uncertainty and bond financing costs,and provides a new explanation for the impact of economic policy uncertainty on other aspects,such as corporate investment.This research also provides policy measures for the government to promote the reduction of financing costs and ease the financing problems of private enterprises.