Macroeconomic Uncertainty and Firm Leverage

This paper investigates the link between the optimal level of nonfinancial firms' leverage and macroeconomic uncertainty. We develop a structural model of a firm's value maximization problem that predicts that as macroeconomic un-certainty increases the firm will decrease its optimal level of borrowing. We test this proposition using a panel of non{financial US firms drawn from the COM-PUSTAT quarterly database covering the period 1991{2001. The estimates confirm that as macroeconomic uncertainty increases, firms decrease their levels of leverage. Furthermore, we demonstrate that our results are robust with respect to the inclusion of the index of leading indicators.