Economic Policy Uncertainty and Dynamics of Capital Structure

56 Pages Posted: 14 Jul 2020

See all articles by Kai Wu

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Seiwai Lai

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: June 22, 2020

Abstract

We examine the effect of economic policy uncertainty (EPU) on the dynamics of the capital structure for U.S.-listed firms from 1985 to 2017. EPU has a negative and significant effect on the firms' speed of capital structure adjustment. EPU tends to increase the cost of external financing and reduce manager sentiment. Besides, the effect is only pronounced for under-levered firms, especially during high EPU period. Further analyses show that the effect is pronounced in firms with high financial constraints and asset specificity. Our findings highlight the important role of EPU in the capital structure dynamics of firms.

Keywords: economic policy uncertainty, capital structure, adjustment cost, manager sentiment

JEL Classification: G10, G11, G14

Suggested Citation

Wu, Kai and Lai, Seiwai, Economic Policy Uncertainty and Dynamics of Capital Structure (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3615532 or http://dx.doi.org/10.2139/ssrn.3615532

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Seiwai Lai

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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