Political Uncertainty, Monetary Policy Contraction and Capital Structure Dynamics

66 Pages Posted: 14 Jul 2020 Last revised: 18 Jan 2023

See all articles by Kai Wu

Kai Wu

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

Yi Liu

Stevens Institute of Technology - School of Business

Seiwai Lai

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

Date Written: January 17, 2023

Abstract

We examine the role of firm-level political risk in the capital structure dynamics for the US-listed firms from 2002 to 2020 with the interaction of monetary policy contraction. We find that higher firm-level political risk can reduce firms' leverage adjustment speed by increasing the costs of adjustment stemming from increasing information asymmetry or agency conflicts. The effect is weaker in the contractionary monetary policy periods and is more visible in under-leveraged than over-leveraged firms. We further find that firms with large exposure to political risk or during the contractionary monetary policy periods are less active in security market activities. The results are robust to instrument variable regression, alternative leverage measures, alternative model specification and estimation techniques, and additional controls. Our findings highlight the importance of accounting for heterogeneous exposure to political risk in capital structure dynamics.

Keywords: political risk, capital structure, information asymmetry, agency conflicts, monetary policy

JEL Classification: G30, G32, D72

Suggested Citation

Wu, Kai and Liu, Yi and Lai, Seiwai, Political Uncertainty, Monetary Policy Contraction and Capital Structure Dynamics (January 17, 2023). 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

Yi Liu

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Seiwai Lai

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

Beijing
China

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