Economic policy uncertainty (EPU) has become a defining challenge for global corporate decision-making. The purpose of this study is to examine how firms’ subjective perceptions of economic policy uncertainty influence their debt financing decisions.
Using China as a strategic research context − representing a large, bank-dominated economy with significant internal heterogeneity − this study adopts the firm-level EPU perception index (FEPU) developed by Nie et al. (2020) based on textual analysis of annual reports. Panel data from 2011 to 2022 are analyzed using robust causal inference techniques, including two-way fixed effects, mediation and instrumental variable approaches. The study tests dual transmission channels and explores multidimensional heterogeneity.
This study finds that heightened perceptions of EPU significantly reduce debt financing. This effect operates through two distinct, parallel channels: suppressing investment demand and tightening financing supply by exacerbating information asymmetry. Notably, the negative impact is most pronounced among firms in financially underdeveloped regions, non-technology-intensive industries, those without strong bank ties and those in the growth stage, revealing a clear structural bias in the transmission of uncertainty shocks.
This study makes two key contributions. First, it shifts the measurement paradigm from macroeconomic proxies to micro-level subjective perceptions, enabling a more direct examination of how uncertainty is internalized by firms. Second, it offers a refined theoretical framework that details the concurrent “demand-supply” transmission mechanism and maps its heterogeneous effects. The findings provide valuable, generalizable insights for policymakers and firms in similarly structured economies navigating uncertainty.
