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

Christopher Baum (), Andreas Stephan () and Oleksandr Talavera

No 602, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: leverage; uncertainty; non-financial firms; panel data (search for similar items in EconPapers)
JEL-codes: C23 D8 D92 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-mac
Date: 2004-09-15, Revised 2007-07-27
Note: formerly circulated as "Macroeconomic Uncertainty and Firm Leverage"
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Published, Economic Inquiry, 47 (2009), 216-225

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Related works:
Journal Article: THE EFFECTS OF UNCERTAINTY ON THE LEVERAGE OF NONFINANCIAL FIRMS (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:602

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