 Is the zero-leverage policy value-enhancing?Wenwen Jiang, Jangkoo Kang and Hwa-Sung Kim The Quarterly Review of Economics and Finance, 2024, vol. 93, issue C, 176-189 Abstract: Incompatible with standard capital structure theories, zero-leverage (ZL) firms are becoming increasingly common in recent decades. In this study, we examine whether shareholders consider a firm’s ZL policy value-enhancing or value-reducing. Using Faulkender and Wang’s (2006) methodology, we find that shareholders place a positive value on the event of a firm switching to zero debt. Furthermore, this valuation is not affected by whether the firm faces a managerial entrenchment problem, but is affected significantly by whether it is financially constrained before becoming debt-free. We find that shareholders place no value on a financially constrained firm following a ZL policy, but place a positive value on an unconstrained firm doing so, indicating that they only consider the latter as a value-enhancing policy. We also show that our finding still holds even when conducting an event study with short-term event windows. We infer that shareholders’ positive valuation on financially unconstrained firms is related to the financial flexibility of ZL policies. Keywords: Zero-leverage; Financial flexibility; Financial constraint; Managerial entrenchment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:93:y:2024:i:c:p:176-189 DOI: 10.1016/j.qref.2023.12.007 Access Statistics for this article The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty More articles in The Quarterly Review of Economics and Finance from Elsevier |
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