Zero leverage and product market competition

Vu Tuan Chu () and Trang Hanh Lam Pham ()
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Vu Tuan Chu: National Economics University
Trang Hanh Lam Pham: National Economics University

SN Business & Economics, 2021, vol. 1, issue 4, 1-18

Abstract: Abstract The paper examines how product market competition can explain why some firms choose to maintain absolutely zero debt in their capital structure despite the clear advantages of debt financing. A wide range of financial theories such as the financial flexibility or underinvestment hypothesis has been put forward to explain the zero-leverage phenomenon. Product market competition plays a crucial role in formulating corporate decisions in private firms but its relationship with the zero-debt holding behavior of private firms is still an underexplored issue in finance research. Results from this study show that product market competition has a significantly positive influence on the zero-leverage behavior of firms but only to certain point. Importantly, the connection between product market competition and zero-leverage policy has been consistently significant across industries and different periods of time. The method used in this paper is the logistic regression, controlling for all the defining characteristics of the firms that reportedly cause them to eschew from debt financing.

Keywords: Zero leverage; Product market competition; Capital structure; Debt financing (search for similar items in EconPapers)
JEL-codes: G21 G34 O16 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s43546-021-00062-9

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