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Global leverage adjustments, uncertainty, and country institutional strength

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  • Çolak, Gönül
  • Gungoraydinoglu, Ali
  • Öztekin, Özde

Abstract

Using a broad range of uncertainty measures, we show that uncertainty dramatically slows down firms’ adjustments toward their optimal capital structure. At the upper bound, the estimated speed of leverage adjustments almost halves when uncertainty is high. High quality institutions (common law legal origin, more disclosure to congress and/or to the public, and higher public sector ethics) and presidential political systems offset some of the adverse effects of uncertainty on leverage adjustments. The financial crisis has altered the relationships among uncertainty, adjustment speeds, and a country's institutions; more so for countries with weak institutions and parliamentary systems.

Suggested Citation

  • Çolak, Gönül & Gungoraydinoglu, Ali & Öztekin, Özde, 2018. "Global leverage adjustments, uncertainty, and country institutional strength," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 41-56.
    • Handle: RePEc:eee:jfinin:v:35:y:2018:i:pa:p:41-56
    DOI: 10.1016/j.jfi.2018.01.010
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    More about this item

    Keywords

    Institutions; International; Leverage; Uncertainty; Speed of adjustment; Financial crisis;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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