Why do firms choose negative net debt policy?

Katsutoshi Shimizu, Kim Ly and Weihan Cui
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Katsutoshi Shimizu: Department of Economics, Nagoya University
Kim Ly: School of Management, Swansea University
Weihan Cui: Graduate school of Economics, Nagoya University

No 2018-32, Working Papers from Swansea University, School of Management

Abstract: This study investigates a new phenomenon that the number of firms that have negative net debt is increasing. Although zero-leverage becomes prevalent in the world, negative net debt phenomena is more prevalent in Japan. We argue that negative net leverage can be regarded as a special form of zero gross leverage. The main findings are (i) poor investment opportunity, low default costs, low cost of holding cash, and abundant cash are the driving forces of negative net leverages, determinants a cash rich firm is more likely to have negative net debt, (ii) the determinants of negative net leverage is qualitatively similar to those of zero leverage, (iii) in particular, higher default probability is a determinant of debt reduction, lower cost of holding cash is a determinant of cash accumulation, less profitable opportunity is a determinant of decreasing dividends, and (iv) firms continue to reduce debts, increase dividend payments and investments over time after achieving negative net leverage.

Keywords: pecking order; leverage; cash; investment (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-10-08
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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