Uncertainty and Capital Structure: Evidence from an Emerging Country

Abstract

This paper investigates the impact of uncertainty on corporate capital structure. Using a sample consists of manufacturing firms listed in the Vietnamese Stock Market during the period from 2010 to 2019, we find that an increase in uncertainty can lead to a reduction in the corporate use of debt. This result is robust when we use a lag model or a System General Method of Moments to deal with the endogeneity problems. Moreover, our result shows that firms decrease their leverage when facing a high level of uncertainty because the increase in leverage during the heightened uncertainty periods may reduce firms’ investment. Given that firms in emerging countries in general and in Vietnam in particular rely significantly on debt financing, the results of our paper suggest that policy makers should have solutions to mitigate the adverse impact of uncertainty on firm leverage.