Zero-debt capital structure and the firm life cycle: empirical evidence from privately held SMEs

Recent research on firms’ capital structure highlights that up to 25% of publicly listed firms are zero-debt firms, a stylized fact that challenges financial theory. In this paper, we study privately held zero-debt small and medium-sized enterprises (SMEs) and identify that approximately 20% of our observations correspond to zero-debt firms. This result is especially surprising in the context of a bank-oriented economy, France. We show that the likelihood of being a zero-debt firm is higher when firms are new-born, which is not surprising, but also when they grow older. In other words, we observe a U-shaped relationship between age and the likelihood of being a zero-debt firm. Our results are consistent with the idea that new-born firms cannot access debt-financing because of a lack of reputation and high informational opacity. When firms grow older, they decide to become debt-free to preserve their financial flexibility and to reduce their dependency toward banks. Overall, this paper suggests that SMEs depend less on bank financing than currently assumed.