Global economic policy uncertainty and corporate cost of capital in Vietnam

Abstract

In the context of the world experiencing an unprecedented rise in economic policy uncertainty in recent decades, this study pioneers an analysis of the impact of global economic policy uncertainty on the cost of capital for Vietnamese enterprises. Using a sample of 1,133 non-financial listed firms over the period 2006-2022, the results of fixed-effects and GMM regressions show that global economic policy uncertainty- including major trading partners like the United States, Europe, and China- has a considerable impact on the average corporate cost of capital in Vietnam, especially the cost of equity. While economic freedom helps reducing average cost of capital in Vietnam, it also exacerbates the adverse effects of global economic policy uncertainty on the cost of capital in Vietnam. Based on our empirical findings, policymakers in Vietnam should lower policy interest rates to support businesses during period of heightened policy uncertainty. Besides, policymakers should implement measures that encourage export diversification to reduce the adverse impact of policy uncertainty originating from main trading partners on Vietnamese businesses.