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

Baum, Christopher F., Stephan, Andreas and Talavera, Oleksandr (2009) The Effects of Uncertainty on the Leverage of Non-Financial Firms. Economic Inquiry, 47 (2). pp. 216-225. ISSN 1465-7295

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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)

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Economics
Faculty of Social Sciences > School of Law
University of East Anglia > Faculty of Social Sciences > Research Groups > Competition Law
Depositing User: Gina Neff
Date Deposited: 16 Nov 2010 16:00
Last Modified: 25 Jul 2018 05:03
DOI: 10.1111/j.1465-7295.2007.00116.x

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