Is there a CSI-leverage nexus?

Huson Joher Ali Ahmed, A.S.M. Sohel Azad, Wai-Ching Poon and Md Safiullah

International Review of Financial Analysis, 2023, vol. 89, issue C

Abstract: We examine how various measures of consumer sentiment index (CSI) affect firms' debt policy decisions. Using U.S. firm-level quarterly data from 1993 to 2017, we provide a strong positive relationship between CSI measures and corporate debt policy, implying that firms use external borrowing during a positive economic outlook and reap the tax-shield benefit. We also find that improved household optimism over financial and business sentiments leads to future household consumption. The CSI-leverage nexus is moderated by the state of firms' financial condition, reputation, and profitability. Importantly, our results are robust to sub-sample analysis, firm-level and macroeconomic controls, econometric specifications, alternative measures of sentiment including Shiller's cyclically adjusted price-earnings ratio (i.e., CAPE_SH), Baker and Wurgler (2006)’s stock market sentiment index (i.e., SENT_BW) and search-based uncertainty measure such as FEARS (i.e., Financial and Economic Attitudes Revealed by Search) index of Da, Engelberg, and Gao (2015).

Keywords: Consumer sentiment; Leverage policy; Consumption expenditure; Investment activities (search for similar items in EconPapers)
JEL-codes: D1 G G31 G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:89:y:2023:i:c:s1057521923003150

DOI: 10.1016/j.irfa.2023.102799

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