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The Mystery of Zero-Leverage Firms

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  • Ilya A. Strebulaev
  • Baozhong Yang

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17946.

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Date of creation: Mar 2012
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Publication status: published as The Mystery of Zero-Leverage Firms (co-authored with Baozhong Yang) Journal of Financial Economics, 2013, 109, 1-23
Handle: RePEc:nbr:nberwo:17946

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Cited by:
  1. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," Working Paper Series 2007-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm Dynamics and Financial Development," NBER Working Papers 15193, National Bureau of Economic Research, Inc.
  3. Baghai, Ramin & Servaes, Henri & Tamayo, Ane, 2011. "Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing," CEPR Discussion Papers 8446, C.E.P.R. Discussion Papers.
  4. Joaquim Ramalho & J. Silva, 2013. "Functional form issues in the regression analysis of financial leverage ratios," Empirical Economics, Springer, vol. 44(2), pages 799-831, April.
  5. Acharya, Viral V. & Davydenko, Sergei A. & Strebulaev, Ilya, 2009. "Cash Holdings and Credit Risk," CEPR Discussion Papers 7125, C.E.P.R. Discussion Papers.
  6. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," SIFR Research Report Series 48, Institute for Financial Research.

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