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Election Uncertainty and Capital Structure

Author

Listed:
  • Bahar Ulupinar

    (West Chester University of Pennsylvania)

  • Isa Camyar

    (Saint Francis College)

Abstract

Given different preference of political parties on macroeconomic issues, elections create a policy uncertainty. We hypothesize that election uncertainty increases cost of equity due to lower investor demand on equity issuances. Using U.S. elections from 1960 to 2010, we show that market leverage and probability to issue leverage are highest in the election year. On the other hand, when the election uncertainty resolves, firms experience a sharp decline in their leverage ratios. This finding suggests that firms rebalance and move their leverage ratios to target leverage. Our results are robust to definition of market and book leverage, S&P credit rating, marginal tax rates, and sub-period analysis

Suggested Citation

  • Bahar Ulupinar & Isa Camyar, 2020. "Election Uncertainty and Capital Structure," Economics Bulletin, AccessEcon, vol. 40(1), pages 425-436.
    • Handle: RePEc:ebl:ecbull:eb-19-00595
    as

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    References listed on IDEAS

    as
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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