The Joint Effects of Economic Policy Uncertainty and Firm Characteristics on Capital Structure: Evidence From US Firms

42 Pages Posted: 20 Nov 2020

See all articles by Xiaoming Li

Xiaoming Li

Massey University - School of Economics and Finance (Albany)

Mei Qiu

Massey University - Massey Business School

Date Written: October 1, 2020

Abstract

This study explores empirically how economic policy uncertainty (EPU) and firm characteristics jointly affect the capital structure decisions of US firms. Using the most comprehensive measure of EPU available, we conceive a research framework by allowing EPU to interact with firm characteristics in dynamic panel regression models, and control for general economic uncertainties and financial crises. Our results reveal that EPU and firm characteristics are jointly important in shaping companies’ debt-financing decisions. The marginal effects of a firm’s characteristics on debt ratios are not constant but change with EPU even in their signs. The marginal effect of EPU on debt ratios is not uniform in the cross-section due to firms having different characteristics and can be positive for some firms while negative for others. However, on average, a rise in EPU would cause economically significant declines in the debt ratios of firms.

Keywords: Economic Policy Uncertainty; Firm Characteristics; Capital Structure; US Firms

JEL Classification: G31; G38

Suggested Citation

Li, Xiaoming and Qiu, Mei, The Joint Effects of Economic Policy Uncertainty and Firm Characteristics on Capital Structure: Evidence From US Firms (October 1, 2020). Journal of International Money and Finance, Vol. 110, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3703339 or http://dx.doi.org/10.2139/ssrn.3703339

Xiaoming Li (Contact Author)

Massey University - School of Economics and Finance (Albany) ( email )

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Mei Qiu

Massey University - Massey Business School ( email )

New Zealand
0064-9-4140800 ext 9281 (Phone)

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