Does uncertainty dampen corporate leverage? Empirical analysis of demand and supply channels

Pragati Priya and Chandan Sharma

Applied Economics, 2024, vol. 56, issue 39, 4702-4717

Abstract: This paper empirically investigates the influence of uncertainty on corporate leverage for 6248 Indian firms for the period 2011– 2021. We find that their leverage tends to fall when policy uncertainty increases. Further, we investigate the two channels through which policy uncertainty affects corporate leverage: demand and supply channels. We find that policy uncertainty increases the burden of debt financing. Furthermore, companies are inclined towards reducing their investment demand during periods of higher uncertainty. Both of these factors contribute to lower debt financing and leverage. Our findings are robust to endogeneity concerns and diverse model identifications using alternate measures of leverage and policy uncertainty.

Date: 2024
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DOI: 10.1080/00036846.2023.2212976

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