Firm Valuation Under Economic Policy Uncertainty: The Moderating Role of Financial Flexibility

Sammanfattning

This thesis examines how economic policy uncertainty (EPU) is associated with firm valuation in Europe and how this association is moderated by firms' financial flexibility, proxied by cash holdings and financial leverage. Using a panel of 104,197 firm-month observations over the period 2005 to 2025, we estimate fixed-effects regressions identified from within-firm, within-country-year variation in country-specific Baker et al. (2016) EPU indices. We document a robust negative association between EPU and Tobin's Q, find partial support for a positive moderation through cash holdings, and maturity-specific support for a negative moderation through financial leverage. The positive cash-based moderation is concentrated at intermediate levels and diminishes at the extremes of the distribution, though the statistical support is partial. Leverage-based moderation operates differentially across maturity components: firms with very low short-term leverage exhibit attenuated EPU sensitivity, while firms with high long-term leverage display the most negative sensitivity. The quantitative findings are complemented by qualitative evidence from eight semi-structured interviews with equity analysts and financial managers, who identify discount-rate premia as the main channel through which EPU depresses firm valuation, and point to liquidity buffers, agency costs, refinancing-risk exposure, and strategic preservation of debt capacity as the primary mechanisms through which financial flexibility can shape EPU exposure in practice.