Economic Policy Uncertainty and the Distribution of Business Operations between Parent Companies and Their Subsidiaries

ABSTRACT

In this paper, we study the influence of uncertainty in economic policy on the business operations distribution using data from China. In doing so, we rely on the China Economic Policy Uncertainty Index and focus on large firms that have subsidiaries to which they can distribute these business operations. Our empirical testing find that companies’ business operations distribution has a negative relationship with uncertainty in economic policies. Further, under the environment of uncertain economic policy, first, the distribution of business operations will converge; second, companies tend to distribute operations to subsidiaries if they have dependence on external financing; third, state-owned companies are more likely to distribute business operations to subsidiaries; finally, companies will distribute business operations within the parent companies in the high degree of financial marketization.

KEYWORDS:

• Business operations distribution
• economic policy uncertainty
• external debt financing dependency
• industry convergence

JEL CLASSIFICATION:

• E44
• L25
• M14

Acknowledgments

Shi gratefully acknowledges financial support from the China National Social Science Foundation (Grant no. 18BGL073) and China National Natural Science Foundation (Grant no. 71802105).

Notes

1. A-shares, also called ordinary RMB shares, are common stocks issued by domestic companies for domestic institutions, organizations, or individuals to subscribe and trade in RMB.

2. CSMAR: The CSMAR financial database, which is the largest and most accurate financial and economic database in China, includes data on stocks, funds, bonds, financial derivatives, listed companies, economy, industry, high-frequency data, and personalized data services.

3. ST: special treatment. Domestically listed companies have unusual financial or other conditions, such as suffering losses for two consecutive years. The stock price of ST stocks is limited to 5%. Special treatment is not a punishment for listed companies, but an objective disclosure of the current situation of listed companies. The purpose is to alert investors to market risks and guide investors to make rational investments. If the company’s abnormal situation is eliminated, normal transactions can be resumed.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71802105]; National Social Science Fund of China [18BGL073].