Assessing the impact of economic policy uncertainty on corporate leverage structure: do foreign ownership act as buffer?

This study explores how economic policy uncertainty (EPU) impacts the leverage structure of firms and considers whether foreign ownership provides a hedge against the EPU. We applied the PCSE and FGLS regressions to panel data from 231 non-financial firms registered in Pakistan for the period 2017–2021. We examined the EPU influences on the firms' leverage structure by considering their capital and debt maturity structures separately. Our research proves a positive correlation between EPU and the total debt ratio regarding capital structure, indicating that firms often take on more leverage amid economic policy uncertainty. Regarding debt maturity, the findings suggest that firms prefer short-term debt financing during EPU for flexibility. Further, the moderating analysis suggests that firms with foreign ownership tend to rely more heavily on long-term debt financing. Also, foreign ownership helps to tackle EPU by providing access to global networks, diversified funding sources and managerial expertise to local firms. Additionally, we did a comparative analysis between large and firms to detect any possible variations in our findings. We recommend that the government should be interested in providing security and a favorable business climate to foreign investors.The challenges posed by Economic Policy Uncertainty (EPU) are particularly significant for developing countries like Pakistan, compared to their developed counterparts. Pakistan's EPU index has been highly volatile, fluctuating dramatically over the past few decades. This unpredictability can be attributed to factors such as terrorism, political instability, and economic downturns. As a result, Pakistani firms often face severe consequences due to escalating EPU circumstances. Given Pakistan's prevalent EPU conditions, our study undertakes a comprehensive analysis of the impact of EPU on the leverage structures of Pakistani firms. This focus is particularly relevant, as emerging countries like Pakistan are more likely to experience EPU compared to developed nations.