The effect of economic policy uncertainty and herding on leverage: An examination of the BRICS countries

Abstract

This study examines the role of economic policy uncertainty (EPU) in influencing firm performance and leverage as a form of financing decisions, in the presence of herding in the emerging markets of Brazil, Russia, India, China and South Africa (BRICS). This study contributes to our understanding of how businesses in emerging markets make financial decisions during uncertain times as well as the role of policy development in influencing firm performance and corporate decisions. The increase or decrease in EPU is determined by the way policymakers or investors act and the consequences of their decisions. EPU is, in fact, a market characteristic that brings changes in prices and returns. Therefore, investors and policymakers should be aware of it to prevent any negative effects. A steady and predictable economic policy is critical to economic growth. We investigate how firms rationalise making leverage financing decisions during times of economic policy uncertainty and if so, if herding is present in these decisions. Our data spans the Top 80 listed firms in each respective country from the beginning of June 2002 to the end of June 2017. Russian, Indian and South African results show that EPU is significant in determining leverage financing decisions and that an increase in EPU leads to herding in such decisions. We find contrary results in Brazilian and Chinese firms. Our results imply that when leverage decisions are made, both the political climate as well as competitor movement data must be considered in determining a firm's "ideal" capital structure. ABOUT THE AUTHORSPrudence Makololo is an Investment Professional and a PhD candidate from the University of Witwatersrand. She obtained her MCom in Finance from the University of the Witwatersrand and her area of interest is behavioural finance and emerging markets. Yudhvir Seetharam is the Head of Analytics, Insights and Research at a major South African bank; and a Senior Lecturer in Finance from the University of the Witwatersrand. His area of research is in quantitative behavioural finance. Yudhvir is an editor for Cogent Economics and Finance.

African agricultural development: How are we contributing?

“…By contrast 17 of the 58 conference papers that address livestock issues focus on some aspect of intensive livestock production (2.8% of the 622 conference papers), but none of them in Botswana, Namibia, or South Africa. While the literature on megatrends makes mention of “policy making” and “democratic development,” these are minority views, and seldom unpacked. Yet there is widespread realization of the destructive role that policy uncertainty can play in an economy (e.g., Faku & Moeti, 2020 and Gumata & Ndou, 2019 in South Africa, and Makololo & Seetharam, 2020 in the BRICS countries), whether macroeconomic policy or sector policies. As we have seen, some two thirds of the research outputs investigated here does recommend some sort of action by the state.…”

Dynamic association of economic policy uncertainty with oil, stock and gold: a wavelet-based approach

“…Several studies have already investigated the impact of EPU on different markets (Hung, 2021; Zhu et al ., 2021; Chen et al ., 2020; Huang et al ., 2020; Makololo and Seetharam, 2020; Nguyen and Schinckus, 2020; Rong. Li et al ., 2020; Balcilar et al ., 2017; Li et al ., 2016; Wu et al ., 2016).…”

“…In the Indian context, a significant number of published articles have also examined the influence of economic uncertainty on stocks (Rong. Li et al ., 2020; Makololo and Seetharam, 2020; Wu et al ., 2016). However, there is a gap in considering Indian EPU, stock, gold and crude oil prices in the Indian market in a single piece of work.…”

Economic Policy Uncertainty and Corporate Leverage Ratio: Evidence in China

“…In Makololo and Seetharam's [14] research focusing on EPU's effect on leverage in BRICS countries, they found that EPU is significant in determining leverage financing decisions in Russian, Indian, and South African companies, after analyzing the top 80 listed firms in each respective country from the beginning of June 2002 to the end of June 2017. However, contrary results in Brazilian and Chinese firms appeared, which is not anticipated.…”