Working Paper

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

Abstract: 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 with bank debt providing insurance for zombie firms in bad economic times.

Keywords: Policy uncertainty; asset prices; debt structure; zombie firms; trade war;

JEL Classification: E44; F13; G12; G20; G30;

https://doi.org/10.24149/wp2212

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2022-08-19

Number: 2212