The relationship between economic policy uncertainty and corporate leverage: Evidence from Brazil

Abstract

We investigate the relationship between economic policy uncertainty and corporate leverage. Empirical evidence suggest that firms tend to lower their leverage ratios when policy uncertainty increases (Pan et al., 2019; Zhang et al., 2015). By using firm-level quarterly data of 163 Brazilian firms from march 2010 to march 2019, we find that Brazilian firms’ leverage ratios increase when economic policy uncertainty increases. Policy uncertainty affects book and market leverage at least two and three quarters into the future, respectively. Surprisingly, unlike policy uncertainty, economic uncertainty cannot explain corporate leverage changes over the sample period. Our results are robust to endogeneity.