Unanticipated Growth, Tobin's Q, and Leverage

Varouj Aivazian, Jeffrey L. Callen and David S. Gelb

Chapter 11 in Bridging the GAAP:Recent Advances in Finance and Accounting, 2012, pp 241-281 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe paper examines (leverage) underinvestment and overinvestment hypotheses, taking into account whether growth is anticipated or unanticipated. This paper sheds light on the following question: Does financial leverage affect the firm's ability to capture industry-wide growth opportunities? Overall, high leverage always appears to be harmful to firm value whether growth is anticipated or not. We also examine if research and development (R&D) intensity mediates the relationship between financial leverage and firm value. We find that the adverse effects of debt on firm performance are much more severe for firms with higher R&D expenditures, irrespective of whether growth opportunities are anticipated or unanticipated. We further investigate the effect of industry competition on the firm's ability to exploit industry-wide growth opportunities in the presence of financial leverage. We find that higher levels of debt appear to adversely affect the productivity of firms operating primarily in less concentrated product markets.

Keywords: Finance; Accounting; Fair Value; Asset Prices; Options; Capital Structure; Debt; Inventory; Leverage; Incentive; Specialists; Generally Accepted Accounting Principles (GAAP) (search for similar items in EconPapers)
Date: 2012
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