Uncertainty, Stock Prices, and Debt Structure: Evidence from the U.S.-China Trade War

Ali Ozdagli, Federal Reserve Bank of Dallas, Jianlin Wang, University of California, Berkeley
2022 Federal Reserve Bank of Dallas, Working Papers  
Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent
more » ... ith bank debt providing insurance for zombie firms in bad economic times.
doi:10.24149/wp2212 fatcat:a54bicbaujaxzf76xft2q42kwq