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The relationship between economic policy uncertainty and corporate leverage: Evidence from Brazil

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  • Schwarz, Lucas Allan Diniz
  • Dalmácio, Flávia Zóboli

Abstract

We investigate the relationship between economic policy uncertainty and corporate leverage. Empirical evidence suggest that firms tend to lower their leverage ratios when policy uncertainty increases (Pan et al., 2019; Zhang et al., 2015). By using firm-level quarterly data of 163 Brazilian firms from march 2010 to march 2019, we find that Brazilian firms’ leverage ratios increase when economic policy uncertainty increases. Policy uncertainty affects book and market leverage at least two and three quarters into the future, respectively. Surprisingly, unlike policy uncertainty, economic uncertainty cannot explain corporate leverage changes over the sample period. Our results are robust to endogeneity.

Suggested Citation

  • Schwarz, Lucas Allan Diniz & Dalmácio, Flávia Zóboli, 2021. "The relationship between economic policy uncertainty and corporate leverage: Evidence from Brazil," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320302890
    DOI: 10.1016/j.frl.2020.101676
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    More about this item

    Keywords

    Leverage; Capital structure; Policy uncertainty;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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