The zero-leverage phenomenon in European listed firms: A financing decision or an imposition of the financial market?

Abstract

This article provides empirical evidence on the zero-leverage phenomenon for a sample of European listed firms for the period 1995–2016. It is shown that there are two types of firms with zero leverage: the financially constrained firms that face obstacles in obtaining external finance, as predicted by the financial constraints hypothesis; and the financially unconstrained firms that maintain zero leverage as a consequence of a financing decision, which supports the financial flexibility hypothesis. The zero-leverage phenomenon is also influenced by the financial system that prevails in each country, being boosted (inhibited) in market-based (bank-based) financial systems, and by the country’s macroeconomic conditions, with the recent financial and sovereign debt crises increasing the propensity for zero leverage in market-based countries. We also find that the financial flexibility hypothesis seems to be more important in market-based systems and that the financial constraints approach did not gain importance during the crisis period. Our results are robust to the use of alternative measures of debt conservatism, explanatory variables, and econometric methods and maintain their validity when we allow for endogeneity in firm size and dividend payments. JEL CLASSIFICATION G32

A Clustering Approach to Identify the Organizational Life Cycle

“…High DPR is another factor that leads to the decline stage of some Iranian pharmaceutical organizations. Policies related to the high distribution of DPR give a positive impression to the company's shareholders, enhancing the share price, and earning a better reputation and more external finance [61,62]. On the other hand, according to our results, high amounts of DPR are one of the causes of organizational decline.…”

Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

“…Another well-established argument in the literature to explain zero-leverage policies is the financial flexibility theory (Dang, 2013;Huang et al, 2017;Morais et al, 2021). In contrast to the financing constraints approach, the financial flexibility hypothesis postulates that zero leverage emerges as a deliberately financing decision taken by the firm, instead of being an imposition raised by creditors (Morais et al, 2020).…”

“…In fact, previous studies often assess financial flexibility by resorting to measures related to internal liquidity and future growth opportunities (Arslan-Ayaydin et al, 2014;Morais et al, 2021). Following Morais et al (2021), we use a natural and simple measure of internal liquidity, firms' cash holdings, the most liquid asset detained by firms, to divide the groups of zero-leverage and leveraged firms into sub-groups of financially flexible and non-flexible firms. We use a similar procedure to that followed for financial constraints to create the categorical variable Cash ratio.…”

Rentabilidade e alavancagem conservadora de empresas brasileiras

“…Para compreender o comportamento da alavancagem em empresas europeias, Morais et al (2021) estudaram o fenômeno da alavancagem conservadora, e as contribuições confirmaram que tanto a flexibilidade financeira quanto as restrições de acesso a crédito entre os diferentes países ocorrem quando a estrutura de capitais apresenta uma alavancagem conservadora.…”

“…Quando se analisa a perspectiva da flexibilidade financeira, a rentabilidade é um dos fatores-chave para a existência da alavancagem conservadora (Morais et al, 2021). Em seu estudo, Titman e Wessels (1988) estabeleceram empiricamente uma relação negativa entre rentabilidade e alavancagem.…”