The effects of uncertainty on the leverage of nonfinancial firms

C.F. Baum, A. Stephan, O. Talavera

Research output: Contribution to journalArticlepeer-review

38 Citations (Scopus)


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.
Original languageEnglish
Pages (from-to)216-225
JournalEconomic Inquiry
Issue number2
Publication statusPublished - 2009


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