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Publication The international zero-leverage phenomenon

Type

Refereed Article

Year

2013

Author(s)

Wolfgang Drobetz
Wolfgang Bessler
Iwan Meier
Rebekka Haller

Journal

Journal of Corporate Finance

Volume

23

Pages

196-221

Research Area

Corporate Finance

Keywords

Capital structure, Zero-leverage, Debt conservatism, Financial constraints

Abstract

Zero-leverage is an international phenomenon which has increased over time. The increasing prevalence of zero-leverage firms is related to IPO waves and the accompanying changes in industry composition. In addition, we attribute the higher propensity to maintain a zero-leverage policy throughout all size and age groups to increasing asset volatility and decreasing corporate tax rates during our sample period. Countries with a common law system, high creditor protection, and a dividend imputation or dividend relief tax system exhibit the highest percentage of zero-leverage firms. Analyzing supply-side capital market frictions, we find that only a small number of profitable firms with high payout ratios deliberately maintain zero-leverage. In contrast, most zero-leverage firms are con-strained by their debt capacity; they are smaller, riskier, and less profitable, and they are the most active equity issuers. With respect to the demand-side of financing choices, we show that firms which pursue a zero-leverage policy only for a short period of time seek financial flexibility. After abandoning zero-leverage, these mostly un-constrained firms switch to higher leverage ratios, make higher investments, and reduce their cash holdings by a larger amount compared to constrained zero-leverage firms, which remain debt-free for longer periods of time.

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