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

Abstract

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.