Economic Policy Uncertainty and Dynamics of Capital Structure
56 Pages Posted: 14 Jul 2020
Date Written: June 22, 2020
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
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