Economic Policy Uncertainty and Cost of Debt Financing in Indonesia
Abstract
This study aims to see the effect of Economic Policy Uncertainty (EPU) to the cost of debt in Indonesia. This quantitative research sample used in this study includes a total of 4,312 observations collected from 453 listed firms on IDX from the period 2006 to 2020. Using fixed-effect panel data regression, our result shows that there is a positive relationship between the cost of debt and EPU, and the effect is even greater when a crisis occurs. With additional analysis conducted, our result show EPU has stronger impact on large firms’ than small firms’ cost of debt. However, when a crisis occurs, EPU has a higher effect on small firms samples than on large firms samples. Thus, it can be concluded if the crisis plays an important role in the research results.
Keywords: Cost Of Debt; Economic Policy Uncertainty; Crisis.
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References
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https://doi.org/https://doi.org/10.1111/1540-6261.00573
Luk, P., Cheng, M., Ng, P., & Wong, K. (2020). Economic policy uncertainty spillovers in small open economies: The case of Hong Kong. Pacific Economic Review, 25(1), 21–46. https://doi.org/https://doi.org/10.1111/1468-0106.12283
Myers, C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147–175.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics. https://doi.org/10.1016/0304-405X(84)90023-0
Phan, H. v., Nguyen, N. H., Nguyen, H. T., & Hegde, S. (2019). Policy uncertainty and firm cash holdings. Journal of Business Research, 95(September 2018), 71–82. https://doi.org/10.1016/j.jbusres.2018.10.001
Tran, Q. T. (2021). Economic policy uncertainty and cost of debt financing: International evidence. The North American Journal of Economics and Finance, 57, 101419. https://doi.org/https://doi.org/10.1016/j.najef.2021.101419
Tran, Q. T., Alphonse, P., & Nguyen, X. M. (2017). Dividend policy: Shareholder rights and creditor rights under the impact of the global financial crisis. Economic Modelling, 64, 502–512. https://doi.org/https://doi.org/10.1016/j.econmod.2017.03.010
Waisman, M., Ye, P., & Zhu, Y. (2015). The effect of political uncertainty on the cost of corporate debt. Journal of Financial Stability, 16, 106–117. https://doi.org/10.1016/j.jfs.2015.01.002
Wang, Y., Chen, C. R., & Huang, Y. S. (2014). Economic policy uncertainty and corporate investment: Evidence from China. Pacific Basin Finance Journal, 26, 227–243. https://doi.org/10.1016/j.pacfin.2013.12.008
Zhang, G., Han, J., Pan, Z., & Huang, H. (2015). Economic policy uncertainty and capital structure choice: Evidence from China. Economic Systems, 39(3), 439–457. https://doi.org/10.1016/j.ecosys.2015.06.003
Ahir, H., Bloom, N., & Furceri, D. (2018). The World Uncertainty Index. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3275033
Ashraf, B. N. (2021). Is Economic Uncertainty a Risk Factor in Bank Loan Pricing Decisions? International Evidence. Risks, 9(5). https://doi.org/10.3390/risks9050081
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Bernanke, B. S. (1980). Irreversibility, Uncertainty, and Cyclical Investment. Quarterly Journal of Economics, 502.
Bernanke, B. S. (1983). Irreversibility, Uncertainty and Cyclical Investment. The Quarterly Journal of Economics, 98(1), 85–106.
Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654. https://doi.org/10.1086/260062
Bloom, N. (2009). The Impact of Uncertainty Shocks. Econometrica, 77(3), 623–685. https://doi.org/10.3982/ECTA6248
Bloom, N. (2014). Fluctuations in Uncertainty. Journal of Economic Perspectives, 28(2), 153–176. https://doi.org/10.1257/jep.28.2.153
Bloom, N., Bond, S., & van Reenen, J. (2007). Uncertainty and investment dynamics. Review of Economic Studies, 74(2), 391–415. https://doi.org/10.1111/j.1467-937X.2007.00426.x
Bordo, M. D., Duca, J. v, & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades. Journal of Financial Stability, 26, 90–106. https://doi.org/https://doi.org/10.1016/j.jfs.2016.07.002
Brand, T., Isoré, M., & Tripier, F. (2019). Uncertainty shocks and firm creation: Search and monitoring in the credit market. Journal of Economic Dynamics and Control, 99, 19–53. https://doi.org/https://doi.org/10.1016/j.jedc.2018.11.003
Caggiano, G., Castelnuovo, E., & Figueres, J. M. (2017). Economic policy uncertainty and unemployment in the United States: A nonlinear approach. Economics Letters, 151, 31–34. https://doi.org/10.1016/j.econlet.2016.12.002
Cao, W., Duan, X., & Uysal, V. B. (2013). Does political uncertainty affect capital structure choices? In Working Paper.
Demir, E., & Ersan, O. (2017). Economic policy uncertainty and cash holdings: Evidence from BRIC countries. Emerging Markets Review, 33, 189–200. https://doi.org/10.1016/j.ememar.2017.08.001
Drobetz, W., el Ghoul, S., Guedhami, O., & Janzen, M. (2018). Policy uncertainty, investment, and the cost of capital. Journal of Financial Stability, 39, 28–45. https://doi.org/10.1016/j.jfs.2018.08.005
Faulkender, M., & Petersen, M. A. (2006). Does the source of capital affect capital structure? In Review of Financial Studies (Vol. 19, Issue 1 SPEC. ISS., pp. 45–79). https://doi.org/10.1093/rfs/hhj003
Flannery, M. J., Kwan, S. H., & Nimalendran, M. (2013). The 2007–2009 financial crisis and bank opaqueness. Journal of Financial Intermediation, 22(1), 55–84. https://doi.org/https://doi.org/10.1016/j.jfi.2012.08.001
Francis, B. B., Hasan, I., & Zhu, Y. (2014). Political uncertainty and bank loan contracting. Journal of Empirical Finance. https://doi.org/10.1016/j.jempfin.2014.08.004
Ghirelli, C., Gil, M., Pérez, J. J., & Urtasun, A. (2021). Measuring economic and economic policy uncertainty and their macroeconomic effects: the case of Spain. Empirical Economics, 60(2), 869–892. https://doi.org/10.1007/s00181-019-01772-8
Gilchrist, S., Sim, J. W., & Zakrajšek, E. (2014). Uncertainty, Financial Frictions and Investment Dynamics (NBER working papers 20038). http://www.nber.org/papers/w20038
Istrefi, K., & Piloiu, A. (2014). Economic Policy Uncertainty and Inflation Expectations. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2510829
Jebran, K., Iqbal, A., Bhat, K. U., Khan, M. A., & Hayat, M. (2019). Determinants of corporate cash holdings in tranquil and turbulent period: evidence from an emerging economy. Financial Innovation, 5(1), 3. https://doi.org/10.1186/s40854-018-0116-y
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/DOI: 10.1016/0304-405X(76)90026-X
Kang, W., Lee, K., & Ratti, R. A. (2014). Economic policy uncertainty and firm-level investment q. Journal of Macroeconomics, 39, 42–53. https://doi.org/10.1016/j.jmacro.2013.10.006
Khaw, K. L. H., Zainudin, R., & Rashid, R. M. (2019). Cost of debt financing: Does political connection matter? Emerging Markets Review, 41. https://doi.org/10.1016/j.ememar.2019.100632
Lemmon, M. L., & Lins, K. v. (2003). Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis. The Journal of Finance, 58(4), 1445–1468.
https://doi.org/https://doi.org/10.1111/1540-6261.00573
Luk, P., Cheng, M., Ng, P., & Wong, K. (2020). Economic policy uncertainty spillovers in small open economies: The case of Hong Kong. Pacific Economic Review, 25(1), 21–46. https://doi.org/https://doi.org/10.1111/1468-0106.12283
Myers, C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147–175.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics. https://doi.org/10.1016/0304-405X(84)90023-0
Phan, H. v., Nguyen, N. H., Nguyen, H. T., & Hegde, S. (2019). Policy uncertainty and firm cash holdings. Journal of Business Research, 95(September 2018), 71–82. https://doi.org/10.1016/j.jbusres.2018.10.001
Tran, Q. T. (2021). Economic policy uncertainty and cost of debt financing: International evidence. The North American Journal of Economics and Finance, 57, 101419. https://doi.org/https://doi.org/10.1016/j.najef.2021.101419
Tran, Q. T., Alphonse, P., & Nguyen, X. M. (2017). Dividend policy: Shareholder rights and creditor rights under the impact of the global financial crisis. Economic Modelling, 64, 502–512. https://doi.org/https://doi.org/10.1016/j.econmod.2017.03.010
Waisman, M., Ye, P., & Zhu, Y. (2015). The effect of political uncertainty on the cost of corporate debt. Journal of Financial Stability, 16, 106–117. https://doi.org/10.1016/j.jfs.2015.01.002
Wang, Y., Chen, C. R., & Huang, Y. S. (2014). Economic policy uncertainty and corporate investment: Evidence from China. Pacific Basin Finance Journal, 26, 227–243. https://doi.org/10.1016/j.pacfin.2013.12.008
Zhang, G., Han, J., Pan, Z., & Huang, H. (2015). Economic policy uncertainty and capital structure choice: Evidence from China. Economic Systems, 39(3), 439–457. https://doi.org/10.1016/j.ecosys.2015.06.003
Published
2022-04-26
How to Cite
KOMARI, Nadya; JULIANA, Rita.
Economic Policy Uncertainty and Cost of Debt Financing in Indonesia.
E-Jurnal Akuntansi, [S.l.], v. 32, n. 4, p. 1020-1031, apr. 2022.
ISSN 2302-8556.
Available at: <https://ojs.unud.ac.id/index.php/akuntansi/article/view/83857>. Date accessed: 14 nov. 2024.
doi: https://doi.org/10.24843/EJA.2022.v32.i04.p14.
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