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THE EFFECTS OF UNCERTAINTY ON THE LEVERAGE OF NONFINANCIAL FIRMS

Authors

  • CHRISTOPHER F. BAUM,

    1. 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 baum@bc.edu
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      We gratefully acknowledge comments and helpful suggestions by Fabio Schiantarelli, Yuriy Gorodnichenko, and Atreya Chakraborty, and the input of participants at Midwest Finance Association, Milwaukee, 2005; Verein für Socialpolitik meeting, Bonn, 2005; and Money, Macro and Finance Conference, Rethymno, 2005. We are also grateful for the constructive suggestions of two anonymous reviewers. The standard disclaimer applies. An earlier version of this paper appears as Chapter 2 of Talavera’s Ph.D. dissertation at European University Viadrina.

  • ANDREAS STEPHAN,

    1. Stephan: Assistant Professor of Economics, Jönköping International Business School, Box 1026, 55111 Jönköping, Sweden. Phone +46-36-101760, Fax +46-36-121832, E-mail andreas.stephan@ihh.hj.se
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      We gratefully acknowledge comments and helpful suggestions by Fabio Schiantarelli, Yuriy Gorodnichenko, and Atreya Chakraborty, and the input of participants at Midwest Finance Association, Milwaukee, 2005; Verein für Socialpolitik meeting, Bonn, 2005; and Money, Macro and Finance Conference, Rethymno, 2005. We are also grateful for the constructive suggestions of two anonymous reviewers. The standard disclaimer applies. An earlier version of this paper appears as Chapter 2 of Talavera’s Ph.D. dissertation at European University Viadrina.

  • OLEKSANDR TALAVERA

    1. Talavera: Research Associate, DIW-Berlin, Mohrenstr. 58, D-10117 Berlin, Germany. Phone +49-30-89789-407, Fax +49-30-89789-104, E-mail otalavera@diw.de
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    • *

      We gratefully acknowledge comments and helpful suggestions by Fabio Schiantarelli, Yuriy Gorodnichenko, and Atreya Chakraborty, and the input of participants at Midwest Finance Association, Milwaukee, 2005; Verein für Socialpolitik meeting, Bonn, 2005; and Money, Macro and Finance Conference, Rethymno, 2005. We are also grateful for the constructive suggestions of two anonymous reviewers. The standard disclaimer applies. An earlier version of this paper appears as Chapter 2 of Talavera’s Ph.D. dissertation at European University Viadrina.


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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