Does Economic Policy Uncertainty Affect Corporate Leverage In South Korea?

Abstract

This paper investigates how economic policy uncertainty (EPU) affects the leverage deviation of listed firms in South Korea in the period from 1999 to 2021. The empirical results show that EPU negatively affects book leverage deviation but positively affects market leverage deviation. Further analysis indicates that the impact of EPU through the financial distress cost channel is negative for both book and market leverage deviation. In contrast, the effect of EPU on leverage deviation through investment spike only works when using long-term and short-term market leverage to compute leverage deviations.