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THE EFFECTS OF UNCERTAINTY ON THE LEVERAGE OF NONFINANCIAL FIRMS |
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| Authors: | CHRISTOPHER F BAUM REAS STEPHAN and OLEKSANDR TALAVERA |
| Institution: | Baum:;Associate Professor of Economics, Department of Economics, Boston College, Chestnut Hill, MA 02467 USA and DIW Research Professor, DIW Berlin, Germany. Phone +1-617-552-3673, Fax +1-617-552-2308, E-mail Stephan:;Assistant Professor of Economics, Jönköping International Business School, Box 1026, 55111 Jönköping, Sweden. Phone +46-36-101760, Fax +46-36-121832, E-mail Talavera:;Research Associate, DIW-Berlin, Mohrenstr. 58, D-10117 Berlin, Germany. Phone +49-30-89789-407, Fax +49-30-89789-104, E-mail |
| 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) |
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