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

Christopher F. Baum, Andreas Stephan, Oleksandr Talavera

Research output: Contribution to journalArticle

41 Citations (Scopus)

Abstract

This paper investigates the link between the optimal level of nonfinancial firms’ short-term leverage and macroeconomic and idiosyncratic sources of uncertainty. We develop a structural model of a firm’s value maximization problem that predicts a negative relationship between uncertainty and optimal levels of borrowing. This proposition is tested using a panel of nonfinancial U.S. firms drawn from the COMPUSTAT quarterly database covering the period 1993–2003. The estimates confirm that as either form of uncertainty increases, firms decrease their levels of short-term leverage. This effect is stronger for macroeconomic uncertainty than for idiosyncratic uncertainty. (JEL C23, D8, D92, G32)
Original languageEnglish
Pages (from-to)216-225
Number of pages10
JournalEconomic Inquiry
Volume47
Issue number2
Early online date22 Jan 2008
DOIs
Publication statusPublished - Apr 2009

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