Risks and financing decisions in the energy sector: An empirical investigation using firm-level data

Using a sample of 102 UK energy firms over the period 1981–2009, this paper empirically examines the effects of uncertainty on firmsʹ leverage decisions. The results indicate that both firms-specific and macroeconomic uncertainty have negative, sizeable, and statistically significant impacts on the UK energy sector firmsʹ target leverage. The results also indicate that the profitability of energy firms plays an important role in uncertainty–leverage relationship by changing the (total) effect of uncertainty on leverage. While more profitable firms appear to reduce their leverage by a relatively large amount in response to increased macroeconomic uncertainty, they are less likely to be affected by firm-specific uncertainty. These results suggest that stability in macroeconomic conditions and business activity is important to the stability of the capital structure of firms in the energy sector which would in turn be conducive to stability in their investments and production.