The Impact of Macroeconomic Uncertainty on Firms’ Changes in Financial Leverage

We investigate the relationship between a firm’s measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm’s ability to borrow. In this paper we investigate how both these channels of influence affects firms’ financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance. ∗This paper was completed during Boyan Liu’s stay as a Visiting Scholar at Boston College, which was financially supported by National Natural Science Foundation of China, No. 70521001, and Research Fund of China Ministry of Education for Ph.D. Development, No. 20050006025. Christopher F Baum gratefully acknowledges financial support from the Fritz Thyssen Foundation. Corresponding author: Christopher F Baum, Department of Economics, Boston College, Chestnut Hill, MA 02467 USA, Tel: 617–552–3673, fax 617–552–2308, e-mail: [email protected].