The Mystery of Zero-Leverage Firms

Abstract

This paper documents the puzzling evidence that a substantial number of large public non-financial US firms follow a zero-debt policy. Over the 1962-2009 period, on average 10.2% of such firms have zero debt and almost 22% have less than 5% book leverage ratio. Neither industry nor size can account for such puzzling behavior. Zero-leverage behavior is a persistent phenomenon, with 30% of zero-debt firms refrain from debt for at least five consecutive years. Particularly surprising is the presence of a large number of zero-leverage firms who pay dividends. They are more profitable, pay higher taxes, issue less equity, and have higher cash balances than their proxies chosen by industry and size. These firms also pay substantially higher dividends than their proxies and thus their total payout ratio is virtually independent of leverage. Firms with higher CEO ownership and longer CEO tenure are more likely to follow a zero-leverage policy, especially if boards are smaller and less independent. Family firms are also more likely to be zero-levered. Our results suggest that managerial and governance characteristics are related to the zero-leverage phenomena in an important way.

The Persistent Puzzle of Corporate Capital Structure: Current Challenges and New Directions

“…In practice, however, a strikingly large number of firms show a strong preference for equity financing over debt financing. For example, Strebulaev and Yang (2012) find that more than 10% of Compustat firms use no debt at all and more than 20% of Compustat firms have leverage ratios of less than 5%. Many firms use equity financing when they appear to have available debt capacity.…”

Do European Firms Behave as if they Converge toward a Target Capital Structure?

“…Further, they demonstrate that highly indebted private US firms heavily rely on debt even after going public, regardless of the changes in the information environment, the distribution of control, and access to new capital. The strong persistence of leverage ratios is also documented by Strebulaev and Yang (2013), who find that firms run by conservative managers remain below optimal debt levels. However, Strebulaev and Yang argue that these firms would benefit between 7 and 15 per cent in equity market value if they moved toward a target.…”

Preserving and Exercising Financial Flexibility in the Global Financial Crisis Period: The Japanese Example

“…Despite many empirical studies related to D&D's descriptive dynamic model, the following basic questions (assuming the D&D model setting) remain unanswered: This article aims to answer these questions using data on 1,555 Japanese public firms for 11 years (2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014). The rationale of using Japanese firm data is explained as follows: Strebulaev and Yang (2013) argue that low or zero leverage is a worldwide phenomenon, while Bessler, Drobetz, Haller, and Meier (2013) find that zero leverage is a common feature in G7 countries, especially the United States and United Kingdom. According to the authors, while firms in the United States and United Kingdom access the capital market for funds, those in Italy, France, and Japan resort to bank loans, thus increasing their leverage.…”