How does uncertainty influence target capital structure? |
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| Institution: | 1. HSBC Business School, Peking University, University Town, Nanshan District, Shenzhen 518055, China;2. NUS Business School, National University of Singapore, BIZ 2 Building #B1-3, 1 Business Link, 117592, Singapore;3. HKUST Business School, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;1. College of Business Administration, Florida International University, 11200 SW 8th St, Miami, FL 33199, United States;2. Hanken School of Economics, P.O. Box 479, 00101 Helsinki, Finland;3. College of Business Administration, Florida International University, 11200 SW 8th St, Miami, FL 33199, United States;1. King Abdul-Aziz University, Faculty of Economics and Administration, Jeddah, Saudi Arabia;2. Taibah University, College of Business Administration, Al Madinah, Saudi Arabia |
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| Abstract: | This study investigates how uncertainty affects firms’ target capital structure using a panel data set of U.S. public manufacturers between 2003 and 2018 and finds that high-uncertainty firms have 10.1 (8.1) percentage points lower mean book (market) targets than low-uncertainty firms. This study also shows that the uncertainty effect on leverage targets is greater than the impact of firm size, market-to-book ratio, assets tangibility, R&D intensity, and industry median leverage, making uncertainty the most critical among all time-varying determinants of leverage targets. Further, this study finds that heightened uncertainty decreases debt tax shields, increases potential financial distress costs, and exacerbates debtholder–shareholder conflicts, thereby leading to a lower optimal or target leverage ratio. |
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