Baum, Christopher F. Stephan, Andreas Talavera, Oleksandr
Year of Publication:
DIW Discussion Papers No. 443
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
This paper investigates the link between the optimal level of non-financial firms' leverage and macroeconomic uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as macroeconomic uncertainty 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 COMPUSTAT 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.
leverage uncertainty non-financial firms panel data