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Zero leverage and the value in waiting to have debt

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  • Lotfaliei, Babak

Abstract

This paper documents that the real option to have debt motivates some firms to remain debt-free, even when standard trade-off theory predicts that these firms should have leverage. The real option has a first-order effect similar to the effect of bankruptcy costs in addressing the zero-leverage puzzle: the observation that many firms seemingly forgo sizable debt benefits by remaining debt-free. The debt-free firms’ value includes the option whose value is derived from future debt benefits and hedging bankruptcy costs. This paper proposes an optimal timing model for having debt and finds support for the model’s predictions through calibrations and simulations.

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  • Lotfaliei, Babak, 2018. "Zero leverage and the value in waiting to have debt," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 335-349.
    • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:335-349
    DOI: 10.1016/j.jbankfin.2018.09.010
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    5. Li, Michelle & Roberts, Helen, 2023. "Zero leverage and dividend policy," Finance Research Letters, Elsevier, vol. 58(PB).
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    7. Michael Espindola Araki & Henrique Castro Martins, 2022. "Integrating uncertainty and governance into a capital structure puzzle: can risk-taking and rule-taking explain zero-leverage firms?," Review of Managerial Science, Springer, vol. 16(6), pages 1979-2034, August.
    8. Ricca, Leandro Telles & Jucá, Michele Nascimento & Hadad Junior, Eli, 2021. "Tax benefit and bankruptcy cost of debt," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 82-92.
    9. Hamelin, Anaïs & Lefebvre, Vivien & Weill, Laurent, 2022. "No debt no performance? CEO gender matters," Economics Letters, Elsevier, vol. 219(C).
    10. Sardo, Filipe & Serrasqueiro, Zélia & Armada, Manuel Rocha, 2024. "Is the zero-leverage policy a persistent phenomenon? Evidence from Portuguese SMEs," Research in International Business and Finance, Elsevier, vol. 69(C).
    11. Haddad, Kamal & Lotfaliei, Babak, 2019. "Trade-off theory and zero leverage," Finance Research Letters, Elsevier, vol. 31(C), pages 165-170.
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    More about this item

    Keywords

    Zero leverage; Real option; Optimal capital structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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