Economic policy uncertainty and cross-border lending

Biswas, S. ORCID: https://orcid.org/0000-0003-3124-5070 and Zhai, W. (2021) Economic policy uncertainty and cross-border lending. Journal of Corporate Finance, 67. 101867. ISSN 1872-6313 doi: 10.1016/j.jcorpfin.2020.101867

Abstract/Summary

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.