Does It Pay to Invest in Debt Free Firms During Recessions?

Tarek Zaher

No 2011-WP-22, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: This study attempts to find out whether investors reward firms that carry no debt and penalize firms that carry large amount of debt during recessions. I compare the performance of portfolios of large cap debt free firms to comparable portfolios of leveraged firms during the last recession. The results of the study suggest that investments in portfolios of debt free firms tend to generate higher returns than investments in portfolios of leveraged firms during recessions. The evidence presented here has clear implications for investors and portfolio managers. During market downturns, debt free firms will not have the additional burden of debt and may be able to recover much quicker than leveraged firms, and therefore they would outperform their peers of leveraged firms. Investors would therefore be better off if a larger portion of their equity investment is allocated to debt free firms rather than leveraged firms.

Keywords: Performance of Debt Free Firms; Good Balance Sheet Firms; Recessions; Financial Leverage; Expected Stock Returns; Zero Debt Firms (search for similar items in EconPapers)
Pages: 19 pages
Date: 2011-09
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Citations: View citations in EconPapers (1)

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