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Prof. Ding Dong
Assistant Professor at the School of Business
Hong Kong Baptist University

This paper presents a tractable general equilibrium model that exhibits endogenous uncertainty and credit cycles. In the model, improved access to credit incentivizes firms to enhance their information acquisition, while increased information acquisition subsequently raises expected profitability, further relaxing borrowing constraints. The interaction between information friction and financial friction gives rise to two-way feedback loop be-tween firm information acquisition and credit conditions, leading to self-fulfilling surges in uncertainty and synchronized recession in real activities. Consistent with the model’s prediction, we find two-way impacts between firm information acquisition and stock valuation from firm-level earnings forecasts and managerial guidance data. This relationship is more pronounced among financially constrained firms, emphasizing the role of credit friction in shaping endogenous uncertainty cycles.