Trade policy uncertainty and firm profitability

The evolving and intricate character of trade policy uncertainty (TPU) and its effects on firm outcomes have attracted growing attention. The findings in this study reveal that both TPU and its volatility exhibit negative correlations with profitability. When the authors probe into possible reasons behind the impact of TPU, they find that the reduction in asset turnover, particularly originating from reduced net working capital turnover, contributes to this effect. Likewise, from an operating perspective, this examination unveils a decrease in operating income and an increase in operating expenses stemming possibly from increased material expenses and SG&A. The subsample analysis demonstrates heterogeneity among firms with varying degrees of financial constraints and across companies in different stages of their life cycle. Furthermore, this study finds that their association is buffered by political sentiment but unaffected by international diversification. This study offers valuable insights into the correlation between trade policy uncertainty and a crucial measure of performance – profitability, thereby enhancing the understanding of corporate outcomes in the policy uncertainty context.