Uncertainty and corporate default risk: Novel evidence from emerging markets

Abstract

Significant attention has been paid in the literature to the socioeconomic consequences of uncertainty; however, few studies have been devoted to the effects on corporate default risk. This study endeavours to fill this gap by investigating the influence of uncertainty on corporate default risk in the context of 26 emerging markets covering the period 1991–2019. Applying panel estimates, the results are robust and consistent. Uncertainty is positively associated with firm default risk measured by the Distance to Default. Interestingly, the impact of uncertainty tends to be greater for the lowest and highest risk firms. The study further finds that uncertainty is positively associated with firm risk-taking behaviour and the cost of debt, while it is negatively associated with cash holdings and financial performance. These effects play as channels of uncertainty impacting firm default risk. Lastly, the results show that the influence of uncertainty on firm risk is less pronounced for larger firms and firms operating in more developed stock markets.