Impact of geopolitical risk on target debt ratio

Abstract

Geopolitical risks (GPR) expose firms to uncertainties that can affect business operations, corporate decisions, and outcomes. We hypothesize that higher GPR is associated with a lower firm's target debt ratio (TDR) because a higher GPR increases the probability of default. Consistent with our hypothesis, we find a significant negative association between GPR and TDR. Additionally, we observe a significant negative association between GPR and distance-to-default score, supporting our view that higher GPR is linked to a greater probability of default. Further heterogeneity analysis indicates that high-tech firms are more vulnerable to the adverse impact of GPR than low-tech firms.

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