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Finite-horizon zero-leverage firms

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  • Clark Lundberg
  • Babak Lotfaliei

Abstract

We develop a binomial lattice model of zero-leverage behaviour using a real option on debt issuance. With the option, firms may delay issuance even when debt is feasible and adds value to the firm. We find that firms are more likely to delay debt issuance when facing shorter debt horizons and longer option horizons. Our results suggest that firms earlier in their life cycle are more likely to be debt-free. This finding is consistent with empirical evidence that young firms are more likely to forgo debt. Our results also suggest that firms unable to access long-term debt markets are more inclined to be free of debt, even if short-term debt issuance is feasible.

Suggested Citation

  • Clark Lundberg & Babak Lotfaliei, 2020. "Finite-horizon zero-leverage firms," Applied Economics Letters, Taylor & Francis Journals, vol. 27(14), pages 1160-1169, July.
    • Handle: RePEc:taf:apeclt:v:27:y:2020:i:14:p:1160-1169
    DOI: 10.1080/13504851.2019.1675860
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    Cited by:

    1. Chipeta, Chimwemwe & Aftab, Nadeem & Machokoto, Michael, 2021. "The implications of financial conservatism for African firms," Finance Research Letters, Elsevier, vol. 42(C).

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