Impact of economic policy uncertainty on the firm's working capital requirements

Policy uncertainty is the uncertainty about the government's future actions. Economic policy uncertainty (EPU) may exist when the macroeconomic environment becomes uncertain. The impact of EPU is significant on the firm's working capital management policy. This study investigates the impact of EPU on the working capital requirement (WCR) level. This study uses the data from 32,190 firms from 22 countries from 1986 to 2017. The results demonstrate that EPU has a significant positive effect on the WCR level. The positive effect of EPU on the WCR remains the same even when we control the endogeneity problem. Considering the possible transmission channels, we divide our sample into the financially constrained and unconstrained firms. The result shows that EPU increases the firm's financial constraints, and those financially constrained firms tend to increase their WCR level to run their day-to-day operation and avoid the risk of losing.