An empirical analysis of zero-leverage and ultra-low leverage firms: Some UK evidence

Arbeitspapier

This paper studies conservative debt policies, focusing on firms with no debt (zero-leverage) or with extremely low debt. Examining an unbalanced panel of U.K. firms, we show that debt conservatism is a common, persistent yet puzzling empirical regularity: nearly 10% of U.K. firms have zero leverage and 18% have market leverage of less than or equal to 1% (ultra-low leverage). Firms maintaining zero-leverage or ultra-low leverage are generally smaller, younger, and less profitable but have a higher payout ratio. These firms also have substantial cash reserves and rely heavily on equity financing in order to mitigate underinvestment incentives. Firms with high-growth opportunities are more likely to adopt and switch to an extremely conservative debt policy. Firms with a large deviation from the target leverage are more likely to lever up. Our explanations for the zero-leverage puzzle are inconsistent with the pecking order theory, inconclusive on the financial flexibility hypothesis but generally supportive of the underinvestment hypothesis and the dynamic trade-off theory.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Manchester Business School Working Paper ; No. 584

Classification and Topics

• Classification: Wirtschaft
• Subject: capital structure ; low-leverage ; zero-leverage ; underinvestment ; financial flexibility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dang, Viet
• Event: Veröffentlichung
• (who): The University of Manchester, Manchester Business School
• (where): Manchester
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/50708
• Last update: 10.03.2025, 11:44 AM CET