Abstract
This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.
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