Firm Leverage Policy Decisions: Does Consumer Behaviour Explain Sectoral-Level Corporate Debt Policy in the U.S?

Abstract

This paper investigates the impact of consumer sentiment on firms’ debt policy decisions and identifies the channels through which consumer sentiment impacts the corporate debt policy of U.S. firms at the sectoral level. Using the panel frameworks, the overall findings suggest a clear link between consumer sentiment which reflects personal financial conditions, business conditions and buying conditions for major ticket items and the choice of debt financing after controlling for firms specific factors and macroeconomic factors. The results also show that the effects of consumer sentiment on firms leverage policy are primary conditioning factors, due to the interaction between optimism about economic outlook reflected in consumer sentiment index and firm profitability. Given no direct link between consumer sentiment and firm leverage policy, we also search for a link via the consumption channel. I find that consumer sentiment positively affects personal consumption expenditures, confirming a link between consumer sentiment and corporate debt policy. Further the results from quantile regressions highlight how the leverage distribution is differentially affected by changes in both consumer sentiment and other control variables. In particular, firms in lower leverage quantiles appear to increase leverage as consumer optimism increases, to reap tax shield benefits. Further, the findings are robust to different time horizons for the pre- and post-crisis periods and consistent across alternative measures of sentiment and debt policy.