A Study On The Influence Of Economic Policy Uncertainty And Financial Constraints On Firms’ Markups

At present,although the world economic situation has improved,it is still unstable.Economic recovery is slow and uneven,and new uncertainties have emerged,especially from the policy level,which has aggravated the risk and challenge of the global economy.Policy uncertainty has become one of the major concerns of whole society.China is in a special period that industrial reform and increased uncertainty of international political and economic environment.China’s economy is facing a "headwind",and needs to cope with both internal and external pressures.Firms engaged in real economy in particular,which not only have to face negative effect of macroeconomic policy uncertainty,but also the severe challenges of high financial cost and difficulty.China’s underdeveloped financial market and dual financial structure lead to serious bias in the allocation of funds.Small and medium-sized firms encounter credit discrimination and private firms have a large "Macmillan Gap".The phenomenon of firms’ financial constraints is particularly prominent,which restricts firms’development.Facing the severe challenges,a problem worthy of studying is how the internal and external shocks affect firms’ development,and how the superposition affects the firms.In view of this,taking firms’ markups as starting point,this study examines effect of economic policy uncertainty,financial constraints and the above two factors’interaction affecting firms’markups from both theoretical and empirical levels,which makes up for the deficiency of existing research,and in the hope of providing reference for the formulation and adjustment of relevant policies.First of all,this paper theoretically analyzes how economic policy uncertainty and financial constraints affect firms’markups on the theoretical basis of economic policy uncertainty,financial constraints and firms’markups.Theoretical analysis reveals that economic policy uncertainty has negative effect on firms’ markups through investment delay effect and financing reduction effect,and financial constraints have negative effect on firms’markups through productivity reduction effect and price adjustment effect.Internal financial constraints have negative effect on firms’ markups,whereas external financial constraints may have a positive or negative effect on firms’ markups.When economic policy uncertainty and financial constraints exist at the same time,they will have interactive effect on firms’ markups.The negative effect of internal financial constraints on firms’ markups aggravates with the increase of economic policy uncertainty.The effect of external financial constraints on firms’markups changes with the increase of economic policy uncertainty,which may aggravates the negative effect or decreases the positive effect or enhances the positive effect.On the basis,economic policy uncertainty is introduced into the theoretical model of external financial constraints and firms’ markups to expand existing model.Then the paper describes the effect of economic policy uncertainty,external financial constraints and the above two factors’interaction on firms’ markups from a theoretical perspective.The results of theoretical model are consist with above theoretical analysis.Unfortunately,the impact of internal financial constraints and the interaction with economic policy uncertainty on firms’ markups has not been proved by theoretical model.Secondly,this paper constructs an econometric model to empirically test the influence of economic policy uncertainty on firms’ markups using economic policy uncertainty index and panel data of Chinese industrial firms from 1999 to 2007 and carries out a series of robustness tests,lag effect analysis and heterogeneity analysis.The main conclusions are as follows:(1)economic policy uncertainty has a significant negative effect on firms’ markups,which is still stable after replacing the variable measurement methods;(2)there is a certain lag in the negative effect of economic policy uncertainty on firms’ markups;(3)test results based on the classification of firms’ ownership and industrial competition degree show that economic policy uncertainty has more serious negative effect on non-state-owned firms’markups and low competitive firms’ markups;(4)test results based on heterogeneous economic policy uncertainty show that fiscal policy uncertainty and monetary policy uncertainty both have negative effect on firms’ markups,and the former has a greater negative effect on firms’markups.Thirdly,this paper constructs an econometric model to empirically test the influence of financial constraints on firms’ markups using panel data of Chinese industrial enterprises from 1999 to 2007 and deals with endogenous problems,at the same time,launches a series of robustness tests and heterogeneity analysis.The main conclusions are as follows:(1)internal and external financial constraints both have a significant negative effect on firms’ markups,which is still stable after dealing with the endogenous problems and replacing the variable measurement methods;(2)test results based on the classification of firms’ownership and industrial competition degree show that internal financial constraints have a significant negative effect on markups of all classified firms and have a greater negative effect on non-state-owned firms’ markups and high competitive firms’ markups,yet external financial constraints have a significant negative effect on firms’ markups except for state-owned firms,and have a significant positive effect on state-owned firms’markups.Lastly,this paper studies the interaction of economic policy uncertainty and financial constraints on firms’ markups by introducing interactive term into the econometric model and carries out heterogeneity analysis.The main conclusions are as follows:(1)the interaction of economic policy uncertainty and internal and external financial constraints both have negative effect on firms’ markups;(2)test results based on the classification of firms’ ownership and industrial competition degree show that the interaction of economic policy uncertainty and internal and external financial constraints both have negative effect on firms’ markups except for state-owned firms,but have no significant effect on state-owned firms’ markups.(3)test results based on heterogeneous economic policy uncertainty show that the interaction of fiscal policy uncertainty,monetary policy uncertainty and internal financial constraints both have no significant effect on firms’ markups,however the interaction of fiscal policy uncertainty,monetary policy uncertainty and external financial constraints both have a significant negative effect on firms’ markups.This paper examines the effect of internal and external shocks and the combined effect of the two shocks on firms’ markups from theoretical and empirical perspective.This study constructs a theoretical model including the economic policy uncertainty,external financial constraints and firms’ markups,which breaks through the limitation of studying the change trend of firms’ markups from a single perspective and provides a theoretical explanation of how the internal and external factors affect the profitability of firms in China.At the same time,the study focuses on the effect of economic policy uncertainty on firms’ markups,which makes up for the deficiency of existing research.In addition,introduction of economic policy uncertainty heterogeneity,firm heterogeneity and internal and external financial constraints forms a relatively complete research framework and enriches relevant research topics,which helps to understand the influence of economic policy uncertainty and financial constraints on firms from a deeper level.