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Macroeconomic Uncertainty and Firm Leverage

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  • Christopher F. Baum
  • Andreas Stephan
  • Oleksandr Talavera

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 un-certainty 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 COM-PUSTAT 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.

Suggested Citation

  • Christopher F. Baum & Andreas Stephan & Oleksandr Talavera, 2004. "Macroeconomic Uncertainty and Firm Leverage," Discussion Papers of DIW Berlin 443, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp443
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    Cited by:

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    2. Muhammad Arif Khan & Xuezhi Qin & Khalil Jebran, 2020. "Uncertainty and leverage nexus: does trade credit matter?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(3), pages 355-389, September.
    3. Vigenina, Denotes & Kritikos, Alexander S., 2004. "The individual micro-lending contract: is it a better design than joint-liability?: Evidence from Georgia," Economic Systems, Elsevier, vol. 28(2), pages 155-176, June.
    4. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2006. "Political Orientation of Government and Stock Market Returns," Working Paper Series 2006,9, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.
    5. Christopher F Baum & Chi Wan, 2009. "Macroeconomic Uncertainty and Credit Default Swap Spreads," Boston College Working Papers in Economics 724, Boston College Department of Economics, revised 03 Mar 2010.
    6. Kozhan, Roman, 2006. "Multiple Priors And No-Transaction Region," Working Paper Series 2006,4, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.

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    More about this item

    Keywords

    Leverage; Uncertainty; Non-financial firms; Panel data;
    All these keywords.

    JEL classification:

    • 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 - - Micro-Based Behavioral Economics - - - 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

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