Effects of Macroeconomic Uncertainty on Leverage for US Non–Financial firms

In this paper we investigate the link between optimal level of leverage and macroeconomic uncertainty. Using the model of firm’s value maximization, we show that as macroeconomic uncertainty increases, captured by an increase in the variability of industrial production or inflation, firms decrease their optimal levels of borrowing. We test this prediction on a panel of non–financial US firms drawn from annual COMPUSTAT quarterly database covering the period 1990-2000, and find that as macroeconomic uncertainty increases, firms behave decrease their levels of leverage. Our results are robust with respect to the inclusion of macroeconomic factors such as interest rate, inflation and index of leading indicators.