The Effects of Uncertainty on the Leverage of Non-Financial Firms
AbstractThis paper investigates the link between the optimal level of nonfinancial firms' leverage and macroeconomic uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as macroeconomic uncertainty increases the firm will decrease its optimal level of borrowing. We test this proposition using a panel of non-financial US firms drawn from the COMPUSTAT quarterly database covering the period 1991-2001. The estimates confirm that as macroeconomic uncertainty increases, firms decrease their levels of leverage. Furthermore, we demonstrate that our results are robust with respect to the inclusion of the index of leading indicators.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 602.
Date of creation: 15 Sep 2004
Date of revision: 27 Jul 2007
Publication status: published, Economic Inquiry, 47 (2009), 216-225
Note: formerly circulated as "Macroeconomic Uncertainty and Firm Leverage"
Contact details of provider:
Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
leverage; uncertainty; non-financial firms; panel data;
Other versions of this item:
- Christopher F. Baum & Andreas Stephan & Oleksandr Talavera, 2009. "The Effects Of Uncertainty On The Leverage Of Nonfinancial Firms," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 216-225, 04.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-09-30 (All new papers)
- NEP-BEC-2004-09-30 (Business Economics)
- NEP-CFN-2004-09-30 (Corporate Finance)
- NEP-MAC-2004-09-30 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1995. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
- Nicholas Bloom & Steve Bond & John Van Reenen, 2001. "The dynamics of investment under uncertainty," IFS Working Papers W01/05, Institute for Fiscal Studies.
- 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, vol. 58(2), pages 277-97, April.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Joseph P. Byrne & E. Philip Davis, 2002.
"Investment and Uncertainty in the G7,"
NIESR Discussion Papers
198, National Institute of Economic and Social Research.
- Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 1-32, April.
- Talavera, Oleksandr & Ozkan, Neslihan & Caglayan, Mustafa & Baum, Christopher F., 2004.
"The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms,"
ZEW Discussion Papers
04-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- 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 69, Society for Computational Economics.
- Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan & Oleksandr Talavera, 2004. "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non–Financial Firms," Discussion Papers in Economics 04/19, Department of Economics, University of Leicester.
- Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan & Oleksandr Talavera, 2004. "The Impact of Macroeconomic Uncertainty on Cash Holdings for Non-Financial Firms," Discussion Papers of DIW Berlin 410, DIW Berlin, German Institute for Economic Research.
- Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988.
"Financing Constraints and Corporate Investment,"
NBER Working Papers
2387, National Bureau of Economic Research, Inc.
- Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
- Alan J. Auerbach, 1985.
"Real Determinants of Corporate Leverage,"
in: Corporate Capital Structures in the United States, pages 301-324
National Bureau of Economic Research, Inc.
- 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.
- Inessa Love, 2003.
"Financial Development and Financing Constraints: International Evidence from the Structural Investment Model,"
Review of Financial Studies,
Society for Financial Studies, vol. 16(3), pages 765-791, July.
- Love, Inessa, 2001. "Financial development and financing constraints - international evidence from the structural investment model," Policy Research Working Paper Series 2694, The World Bank.
- Roberto Álvarez & Andrés Sagner & Carla Valdivia, 2012.
"Liquidity Crises and Corporate Cash Holdings in Chile,"
The Developing Economies,
Institute of Developing Economies, vol. 50(4), pages 378-392, December.
- Roberto Álvarez & Andrés Sagner & Carla Valdivia:, 2010. "Liquidity Crises and Corporate Cash Holdings in Chile," Working Papers Central Bank of Chile 564, Central Bank of Chile.
- Rashid, Abdul, 2013. "Risks and financing decisions in the energy sector: An empirical investigation using firm-level data," Energy Policy, Elsevier, vol. 59(C), pages 792-799.
- 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
688, Boston College Department of Economics.
- Christopher F. Baum & Atreya Chakraborty & Boyan Liu, 2010. "The impact of macroeconomic uncertainty on firms' changes in financial leverage," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 22-30.
- 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, vol. 21(3), pages 459-474, 08.
- Christopher F Baum & Mustafa Caglayan & Oleksandr Talavera, 2009. "The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity," Boston College Working Papers in Economics 712, Boston College Department of Economics, revised 23 Jul 2012.
- repec:eme:jrfpps:v:11:y:2011:i:4:p:339-347 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.