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Macroeconomic Uncertainty and Firm Leverage

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

No 443, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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 un-certainty 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 COM-PUSTAT 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)
Pages: 23 p.
Date: 2004
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Working Paper: Macroeconomics Uncertainty and Firm Leverage (2005) Downloads
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