The impact of economic policy uncertainty on the profitability of textile industry: evidence from BRIC countries

Abstract

There has recently been a growing interest in the impact of economic policy uncertainty at the micro- and macro-level in developing and emerging market economies. This study aims to analyse the impact of economic policy uncertainty on the profitability of more than 500 publicly listed textile companies in BRIC countries for the period 2012-2021. By employing the panel data methodology, we find that the economic policy uncertainty index developed by has a significantly negative contemporaneous and lagged effect on financial performance. Our findings are robust to both alternative profitability metrics and dynamic model specifications. We also identify that economic policy uncertainty exerts an adverse impact on profitability through the capital structure channel at the micro-level and institutional quality channel at the macro-level. While equity capital can emerge as a powerful weapon against the consequences of heightened uncertainty at the firm level, any improvement in the institutional framework at the national level can also help firms to mitigate the losses from unanticipated policy changes. However, there are certain limitations to which good institutions absorb uncertainty shocks when they are permanently at a high plateau.