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Leverage, investment, and firm growth

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  • Lang, Larry
  • Ofek, Eli
  • Stulz, Rene M.

Abstract

We show that there is a negative relation between leverage and future growth at the firm level and, for diversified firms, at the segment level. Further, this negative relation between leverage and growth holds for firms with low Tobin's q, but not for high-q firms or firms in high-q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities, but is negatively related to growth for firms whose growth opportunities are either not recognized by the capital markets or are not sufficiently valuable to overcome the effects of their debt overhang.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 40 (1996)
Issue (Month): 1 (January)
Pages: 3-29

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Handle: RePEc:eee:jfinec:v:40:y:1996:i:1:p:3-29

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Web page: http://www.elsevier.com/locate/inca/505576

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References

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  1. Merton H. Miller, 1991. "Leverage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 6-13.
  2. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  3. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
  4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
  5. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 3-27, July.
  6. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 94-18, Board of Governors of the Federal Reserve System (U.S.).
  7. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(1), pages 137-154, September.
  8. Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers, Rochester, Business - Financial Research and Policy Studies 92-02, Rochester, Business - Financial Research and Policy Studies.
  9. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
  10. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  11. Steven A. Sharpe, 1993. "Financial market imperfections, firm leverage and the cyclicality of employment," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-10, Board of Governors of the Federal Reserve System (U.S.).
  12. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
  13. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
  14. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  15. Richard W. Kopcke & with Mark M. Howrey, 1994. "A panel study of investment: sales, cash flow, the cost of capital, and leverage," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 9-30.
  16. Richard Cantor, 1990. "Effects of leverage on corporate investment and hiring decisions," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 31-41.
  17. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
  18. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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