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.
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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"
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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; Longitudinal Data; Spatial Time Series
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- 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.:
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