EconPapers    
Economics at your fingertips  
 

Zero leverage and the value in waiting to have debt

Babak Lotfaliei

Journal of Banking & Finance, 2018, vol. 97, issue C, 335-349

Abstract: This paper documents that the real option to have debt motivates some firms to remain debt-free, even when standard trade-off theory predicts that these firms should have leverage. The real option has a first-order effect similar to the effect of bankruptcy costs in addressing the zero-leverage puzzle: the observation that many firms seemingly forgo sizable debt benefits by remaining debt-free. The debt-free firms’ value includes the option whose value is derived from future debt benefits and hedging bankruptcy costs. This paper proposes an optimal timing model for having debt and finds support for the model’s predictions through calibrations and simulations.

Keywords: Zero leverage; Real option; Optimal capital structure (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426618301973
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:97:y:2018:i:c:p:335-349

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-01-19
Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:335-349