Geopolitical risk and corporate capital structure

Md Shahedur R. Chowdhury, Mohsen Aram, Siamak Javadi and Ali Nejadmalayeri

Journal of Corporate Finance, 2025, vol. 93, issue C

Abstract: Using a news-based index of geopolitical risk (GPR) and over 62 years of data, we find that GPR has a long-lasting negative impact on leverage. Our result is robust to different model specifications, different proxies for leverage, a battery of robustness tests, and survives after addressing endogeneity concerns. Further, we provide evidence that the effect is channeled through declining shifts in both the demand and supply of credit. Cross-sectional tests indicate that the effect is stronger for firms with higher existing leverage, those with more irreversible investment, and those whose stock returns are more sensitive to GPR. Overall, our analysis indicates that GPR is more important than other macro-level determinants of capital structure such as inflation, GDP growth, interest rate variables and other widely used measures of uncertainty.

Keywords: Geopolitical risk; Capital structure policy; Leverage (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:93:y:2025:i:c:s0929119925000641

DOI: 10.1016/j.jcorpfin.2025.102796

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