Election Uncertainty and Capital Structure

Bahar Ulupinar () and Isa Camyar ()
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Bahar Ulupinar: West Chester University of Pennsylvania
Isa Camyar: Saint Francis College

Economics Bulletin, 2020, vol. 40, issue 1, 425-436

Abstract: Given different preference of political parties on macroeconomic issues, elections create a policy uncertainty. We hypothesize that election uncertainty increases cost of equity due to lower investor demand on equity issuances. Using U.S. elections from 1960 to 2010, we show that market leverage and probability to issue leverage are highest in the election year. On the other hand, when the election uncertainty resolves, firms experience a sharp decline in their leverage ratios. This finding suggests that firms rebalance and move their leverage ratios to target leverage. Our results are robust to definition of market and book leverage, S&P credit rating, marginal tax rates, and sub-period analysis

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2020-02-07
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