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The Effects of Uncertainty on the Leverage of Non-Financial Firms

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Author Info

  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Andreas Stephan

    (Europa-Universitat Viadrina
    DIW Berlin)

  • Oleksandr Talavera

    ()
    (DIW Berlin)

Abstract

This 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 Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 602.

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Date of creation: 15 Sep 2004
Date of revision: 27 Jul 2007
Publication status: published, Economic Inquiry, 47 (2009), 216-225
Handle: RePEc:boc:bocoec:602

Note: formerly circulated as "Macroeconomic Uncertainty and Firm Leverage"
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Keywords: leverage; uncertainty; non-financial firms; panel data;

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References

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  1. Alan J. Auerbach, 1985. "Real Determinants of Corporate Leverage," NBER Chapters, in: Corporate Capital Structures in the United States, pages 301-324 National Bureau of Economic Research, Inc.
  2. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  6. Nicholas Bloom & Steve Bond & John Van Reenen, 2001. "The dynamics of investment under uncertainty," IFS Working Papers W01/05, Institute for Fiscal Studies.
  7. Love, Inessa, 2001. "Financial development and financing constraints - international evidence from the structural investment model," Policy Research Working Paper Series 2694, The World Bank.
  8. n/a, 1999. "An Artificial Neural Network System of Leading Indicators," NIESR Discussion Papers 198, National Institute of Economic and Social Research.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
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Cited by:
  1. 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 001, School of Economics, University of East Anglia, Norwich, UK..
  2. 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.
  3. 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.
  4. 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.
  5. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers 1302, Centre for Finance and Investment, Heriot Watt University.
  6. 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.

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