How does uncertainty influence target capital structure?

Hyun Joong Im, Ya Kang and Janghoon Shon

Journal of Corporate Finance, 2020, vol. 64, issue C

Abstract: This study investigates how uncertainty affects firms’ target capital structure using a panel data set of U.S. public manufacturers between 2003 and 2018 and finds that high-uncertainty firms have 10.1 (8.1) percentage points lower mean book (market) targets than low-uncertainty firms. This study also shows that the uncertainty effect on leverage targets is greater than the impact of firm size, market-to-book ratio, assets tangibility, R&D intensity, and industry median leverage, making uncertainty the most critical among all time-varying determinants of leverage targets. Further, this study finds that heightened uncertainty decreases debt tax shields, increases potential financial distress costs, and exacerbates debtholder–shareholder conflicts, thereby leading to a lower optimal or target leverage ratio.

Keywords: Uncertainty; Target leverage; Capital structure; Asset volatility (search for similar items in EconPapers)
JEL-codes: D22 D81 G31 G32 G33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:64:y:2020:i:c:s0929119920300869

DOI: 10.1016/j.jcorpfin.2020.101642

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