Is there a CSI-leverage nexus?

• Main Authors: Ahmed, H.J.A., Azad, A.S.M.S., Poon, W.C., Safiullah, M.
• Format: Article
• Published: Elsevier Inc. 2023
• Online Access: http://scholars.utp.edu.my/id/eprint/37334/; https://www.scopus.com/inward/record.uri?eid=2-s2.0-85165354807&doi=10.1016%2fj.irfa.2023.102799&partnerID=40&md5=aa4b51e06db056f17bcbcaf3ebed04c5
• Institution: Universiti Teknologi Petronas

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., CAPESH), Baker and Wurgler (2006)�s stock market sentiment index (i.e., SENTBW) and search-based uncertainty measure such as FEARS (i.e., Financial and Economic Attitudes Revealed by Search) index of Da, Engelberg, and Gao (2015). © 2023