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Impact of geopolitical risk on target debt ratio

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  • Shrestha, Keshab
  • Philip, Sheena Sara Suresh
  • Khaw, Karren Lee-Hwei

Abstract

Geopolitical risks (GPR) expose firms to uncertainties that can affect business operations, corporate decisions, and outcomes. We hypothesize that higher GPR is associated with a lower firm's target debt ratio (TDR) because a higher GPR increases the probability of default. Consistent with our hypothesis, we find a significant negative association between GPR and TDR. Additionally, we observe a significant negative association between GPR and distance-to-default score, supporting our view that higher GPR is linked to a greater probability of default. Further heterogeneity analysis indicates that high-tech firms are more vulnerable to the adverse impact of GPR than low-tech firms.

Suggested Citation

  • Shrestha, Keshab & Philip, Sheena Sara Suresh & Khaw, Karren Lee-Hwei, 2024. "Impact of geopolitical risk on target debt ratio," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323013363
    DOI: 10.1016/j.frl.2023.104964
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    Cited by:

    1. António Afonso & José Alves & Sofia Monteiro, 2024. "Echoes of Instability: How Geopolitical Risks Shape Government Debt Holdings," CESifo Working Paper Series 11235, CESifo.

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    More about this item

    Keywords

    Geopolitical risk; Target debt ratio; Distance-to-default; High-tech firms;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G40 - Financial Economics - - Behavioral Finance - - - General

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