Trade-off theory and zero leverage

Kamal Haddad and Babak Lotfaliei

Finance Research Letters, 2019, vol. 31, issue C, 165-170

Abstract: This paper documents that the timing of debt issuance is important to produce zero leverage in the firms’ cross-section based on the static trade-off theory. Therefore, even basics of the trade-off theory do not contradict with zero leverage, also known as the zero-leverage mystery. Earlier static trade-off models fail to produce zero leverage because they ignore the optimal timing to have debt. We introduce this new mechanism in the static trade-off model, which appears as strong as considering the default costs. We show the application of this mechanism to generate zero leverage in two varieties of the static trade-off models.

Keywords: Zero leverage; Static trade-off; Optimal capital structure (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:31:y:2019:i:c:p:165-170

DOI: 10.1016/j.frl.2019.04.011

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