Financing and investment decisions in times of uncertainty

This thesis presents three studies on uncertainty spillovers and their effects on corporate sectors' investment and financing decisions. The second chapter examines the impact of international capital flows on the Chinese real economy during the Chinese Corporate Debt Crisis. It exploits an extensive dataset on Chinese firm-level characteristics and international cross-border flows between 2005 and 2016. It finds that capital inflows expand the capital availability of Chinese banks and result in more credit, especially to more risky firms – with lower profitability and a higher risk of insolvency. These results indicate a risk-taking channel originating from banks' greater liquidity during capital inflow surges. I recommend stricter supervision of Chinese banks in times of capital inflow surges and more targeted macroprudential policies. The third chapter, motivated by the sovereign debt crisis and based on a dataset including bilateral Foreign Direct Investment (FDI) holdings, investigates the implications of sovereign and bank-related risk on FDI in the Eurozone. In this chapter, strikingly, I discover that only banking risk in the country of origin impacts FDI choices. On the contrary, sovereign risk in both origin and host countries appears to have effects. These results suggest that although poor financial discipline by host governments has been widely blamed as the primary factor likely to frighten off overseas investors, it is amongst FDI supplying nations that the effects of sovereign yields seem most pronounced. The fourth chapter, building on Wright et al. (2016), explores the effect of uncertainty spillovers of Brexit on UK PE activity and the channels that transmit uncertainty to the PE market. In this chapter, employing a novel dataset on PE targets and non-targets over the 2010–2019 period, I find that uncertainty, especially Brexit-related uncertainty, negatively affects the UK's PE activity. Moreover, the transmission of such uncertainty occurs primarily through the real-options channel and tension arising from prolonged interim periods of PE deals. These results imply that ongoing uncertainty in Brexit policy will continue to depress PE activity and, by extension, investment and growth in the UK. This thesis proposes that the domestic real economy is very "fragile" and sensitive to the global economic condition and uncertainty in geographies far from the domestic borders. Therefore, identifying better ways to support economic resilience and prevent cross-country spillovers have never been more crucial.