The determinants of negative net leverage policy: New evidence from Japan

A negative net leverage firm can immediately become a zero-leverage firm by repaying their outstanding debt; however, the majority of negative net leverage firms in Japan still have positive gross debt. This paper investigates the determinants of a negative net leverage policy. Previous literature argues that zero-leverage is the result of high growth opportunity. However, by using a sample of Japanese non-financial firms over the period 1991–2015, we find that the driving forces of negative net leverage policy are low growth opportunity, low default possibility, and high cash holdings. Furthermore, a lower risk-free rate induces firms to increase cash holding, and therefore decrease net leverage. As time goes by, negative net leverage firms cease to accumulate cash and gradually repay debt. We suggest that policymakers improve the investment environment and enhance the effective allocation of firm funding, especially during a period of low risk-free rates.