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

Author

Listed:
  • 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.

Suggested Citation

  • Christopher F. Baum & Andreas Stephan & Oleksandr Talavera, 2004. "The Effects of Uncertainty on the Leverage of Non-Financial Firms," Boston College Working Papers in Economics 602, Boston College Department of Economics, revised 27 Jul 2007.
    • Handle: RePEc:boc:bocoec:602
    Note: formerly circulated as "Macroeconomic Uncertainty and Firm Leverage"
    as

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    References listed on IDEAS

    as
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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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