The impact of economic policy uncertainty on capital structure decisions: Does institutional ownership characteristics matter?

Abstract

This paper aims, first, to investigate the effect of EPU and institutional ownership characteristics on capital structure decisions and, second, to examine the role of institutional investors characteristics during the periods of uncertainty. Based on a sample of 2100 firm-year observations from the French non-financial companies over the period of 2006–2019, this study uses panel data regressions, two stage least squares and propensity score matching. We find that firms tend to lower their leverage ratios when policy uncertainty increases. Furthermore, we show that capital structure decisions depend on institutional ownership characteristics. Our results, also, indicate that the presence of active investors, such as long-term institutional ownership and institutional common ownership, helps to mitigate the financing frictions in uncertainty periods.