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The Effects Of Uncertainty On The Leverage Of Nonfinancial Firms

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  • CHRISTOPHER F. BAUM
  • ANDREAS STEPHAN
  • OLEKSANDR TALAVERA

Abstract

"This paper investigates the link between the optimal level of nonfinancial firms' short-term leverage and macroeconomic and idiosyncratic sources of uncertainty. We develop a structural model of a firm's value maximization problem that predicts a negative relationship between uncertainty and optimal levels of borrowing. This proposition is tested using a panel of nonfinancial U.S. firms drawn from the COMPUSTAT quarterly database covering the period 1993-2003. The estimates confirm that as either form of uncertainty increases, firms decrease their levels of short-term leverage. This effect is stronger for macroeconomic uncertainty than for idiosyncratic uncertainty. " Copyright (c) 2008 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 47 (2009)
Issue (Month): 2 (04)
Pages: 216-225

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Handle: RePEc:bla:ecinqu:v:47:y:2009:i:2:p:216-225

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  1. Simon Gilchrist & Charles Himmelberg, 1999. "Investment: Fundamentals and Finance," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274 National Bureau of Economic Research, Inc.
  2. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
  3. Christopher F Baum & Mustafa Caglayan & Neslihan Ozkan, 2003. "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms," Computing in Economics and Finance 2003, Society for Computational Economics 69, Society for Computational Economics.
  4. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  5. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1777-1804, 08.
  6. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  7. Professor E. Philip Davis, 2002. "Investment and Uncertainty in the G7," NIESR Discussion Papers, National Institute of Economic and Social Research 144, National Institute of Economic and Social Research.
  8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  9. n/a, 1999. "An Artificial Neural Network System of Leading Indicators," NIESR Discussion Papers, National Institute of Economic and Social Research 198, National Institute of Economic and Social Research.
  10. Alan J. Auerbach, 1983. "Real Determinants of Corporate Leverage," NBER Working Papers 1151, National Bureau of Economic Research, Inc.
  11. Vivek Ghosal & Prakash Loungani, 2000. "The Differential Impact of Uncertainty on Investment in Small and Large Businesses," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 338-343, May.
  12. Nicholas Bloom & Steve Bond & John Van Reenen, 2001. "The dynamics of investment under uncertainty," IFS Working Papers, Institute for Fiscal Studies W01/05, Institute for Fiscal Studies.
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Cited by:
  1. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers, Centre for Finance and Investment, Heriot Watt University 1302, Centre for Finance and Investment, Heriot Watt University.
  2. Rashid, Abdul, 2013. "Risks and financing decisions in the energy sector: An empirical investigation using firm-level data," Energy Policy, Elsevier, Elsevier, vol. 59(C), pages 792-799.
  3. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2013. "The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 21(3), pages 459-474, 08.
  4. Christopher F. Baum & Atreya Chakraborty & Boyan Liu, 2008. "The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage," Boston College Working Papers in Economics, Boston College Department of Economics 688, Boston College Department of Economics.
  5. Roberto Álvarez & Andrés Sagner & Carla Valdivia:, 2010. "Liquidity Crises and Corporate Cash Holdings in Chile," Working Papers Central Bank of Chile, Central Bank of Chile 564, Central Bank of Chile.
  6. Christopher F Baum & Mustafa Caglayan & Oleksandr Talavera, 2010. "Corporate Liquidity Management and Future Investment Expenditures," University of East Anglia Applied and Financial Economics Working Paper Series, School of Economics, University of East Anglia, Norwich, UK. 001, School of Economics, University of East Anglia, Norwich, UK..

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