The effect of economic policy uncertainty on leverage & the role of ESG : evidence from the US energy sector

Abstract

This study examines the relationship between economic policy uncertainty (EPU) and the capital structure decisions of US energy firms, and how this relationship is different between firms with high and low environmental, social, and governance (ESG) scores. Utilizing an unbalanced panel dataset consisting of 1223 firm-year observations for 136 firms over the period of 2005-2024, this study aims to provide industry specific evidence on how policy uncertainty affects energy firms’ access to debt and the role of ESG in these decisions. Our results show a consistent negative association between EPU and market leverage. The negative effect is stronger for firms with higher ESG scores, suggesting that stronger ESG performance may intensify the reduction of leverage at times of heightened EPU. These findings remain robust when excluding the COVID-19 years, replacing market with book leverage, utilizing a different uncertainty measure and using a different estimator. This study offers insights for managers, policymakers and lenders to better understand financing decisions at times of increased policy uncertainty.