Banking uncertainty and corporate financial constraints

Abstract

This article investigates an essential channel through which uncertainty may harm the economy—firms' financing constraints. Unlike prior literature focusing on the aspect of aggregate economic policy uncertainty, we look into the dimension of disaggregate uncertainty in the banking system. Examining financial data of commercial banks and listed companies in Vietnam during 2008–2022, we document that banking uncertainty positively impacts corporate financial constraints. Moreover, we explore how firm-specific and macroeconomic factors interact with the relationship between uncertainty and financing constraints. Our analysis indicates that this link is more pronounced for non-state-owned firms, firms with more intangible assets, and firms listed on the Hanoi stock exchange. Meanwhile, macro shocks, such as the financial crisis and the COVID-19 pandemic can strengthen the effect of banking uncertainty on financing constraints. Finally, we examine the mechanisms through which banking uncertainty causes an increase in firms' financial constraints. We document that banking uncertainty exacerbates financial constraints by raising the cost of external financing, not by lowering firm performance.