Thesis
The impact of economic policy uncertainty on corporate financial decisions and stock market returns
- Creator
- Rights statement
- Awarding institution
- University of Strathclyde
- Date of award
- 2026
- Thesis identifier
- T18099
- Person Identifier (Local)
- 202154943
- Qualification Level
- Qualification Name
- Department, School or Faculty
- Abstract
- Economic policy uncertainty (EPU) is a non-diversifiable shock which plays a crucial role in corporate financial decisions and firms’ stock market performance. This thesis investigates three key issues related to the effects of EPU on corporate financial decisions and stock returns. First, we examine the effect of EPU on firms’ financing mix using the system-GMM method and annual data on listed companies in France, Germany, Japan, the United Kingdom, and the United States between 1999 and 2022. We find that changes in lagged EPU are positively associated with firms’ leverage ratios. The results are robust to both book and market leverage ratios. The effects of EPU on leverage ratios also depend on the debt maturity period (term) and institutional conditions. Changes in EPU are positively associated with short-term and long-term leverage ratios. Moreover, A weaker regulatory environment amplifies the long-term delayed positive effect of EPU on the book leverage ratio and its long-term component. In contrast, the strong regulatory environment strengthens the short-term positive effect of EPU on the book leverage ratio. Second, we investigate the impact of EPU on firms' payout policies and the motivations (rationales) underlying it. We employ fixed-effects panel regression and the inverse propensity weighting (IPW) method to analyse year-firm data from France, Germany, Japan, the United Kingdom, and the United States between 1999 and 2022. We find that changes in EPU are positively correlated with changes in the total payout ratio. Additionally, firms’ dividend payout ratios and dividend yields are positively associated with changes in EPU. However, firms tend to decrease their regular dividends if EPU increases over an extended period. Moreover, we find that share repurchases tend to increase when EPU rises. Finally, the mediation tests suggest that free cash flow is a channel through which firms increase payouts to distribute surplus cash flows when EPU rises, while financial constraints are a channel through which firms increase payouts even as they are more financially constrained during EPU times. Third, we examine the impact of EPU on stock market returns and the underlying transmission mechanisms. Using monthly and quarterly panel data from 22 countries between 1997 and 2021, the fixed-effect panel and quantile regressions suggest an inverse and robust association between EPU and stock market returns. Although the negative relationship holds in both developed and developing country groups, the response of stock market returns is more delayed in developing countries. Finally, using Baron and Kenny's (1986) mediation tests, we identify three channels through which changes in EPU affect stock market returns: the risk premium, investment, and the dividend yield. Overall, this thesis suggests that EPU plays an important role in corporate financial decisions and stock market returns. An increase in EPU is associated with higher leverage ratios, increased payouts to shareholders, and lower stock market returns. Declined investment, heightened risk perception and premium, reduced corporate profitability, and exacerbated agency problems following EPU rises are reasons behind the above effects.
- Advisor / supervisor
- Paudyal, Krishna
- Resource Type
- DOI
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PDF of thesis T18099 | 2026-08-11 | Public | Download |