Is the zero-leverage policy value-enhancing?

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Incompatible with standard capital structure theories, zero-leverage (ZL) firms are becoming increasingly common in recent decades. In this study, we examine whether shareholders consider a firm's ZL policy value -enhancing or value-reducing. Using Faulkender and Wang's (2006) methodology, we find that shareholders place a positive value on the event of a firm switching to zero debt. Furthermore, this valuation is not affected by whether the firm faces a managerial entrenchment problem, but is affected significantly by whether it is financially constrained before becoming debt-free. We find that shareholders place no value on a financially constrained firm following a ZL policy, but place a positive value on an unconstrained firm doing so, indicating that they only consider the latter as a value-enhancing policy. We also show that our finding still holds even when conducting an event study with short-term event windows. We infer that shareholders' positive valuation on financially unconstrained firms is related to the financial flexibility of ZL policies.
Elsevier BV
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The Quarterly Review of Economics and Finance, v.93, pp.176 - 189

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MT-Journal Papers(저널논문)
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