The Zero-leverage Puzzle : Evidence from Sweden

• Main Author: Spennare, Karin
• Format: Others
• Language: English
• Published: Uppsala universitet, Företagsekonomiska institutionen 2021
• Subjects: financing decisions; capital structure; zero leverage; debt conservatism; financial constraints; financial flexibility; Business Administration; Företagsekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-450351

This study investigates why some firms have no debt in their capital structure despite the potential benefits of leverage. A logistic regression analysis is used to examine the impact of firm-specific characteristics on a firm’s propensity to have zero leverage. The validity of five theoretical explanations for the zero-leverage phenomenon are examined based on how the theories predict characteristics to affect a firm’s propensity to be unlevered. Analysing a new sample of Swedish firms listed on Nasdaq Stockholm in 2005-2018, I show that on average 14.2% of all firms are unlevered. The regression results suggest that the phenomenon of zero-leverage firms can be explained by a combination of several theories. Some firms seem forced to follow zero-leverage policies due to credit rationing by lenders. Others appear to be deliberately debt-free either because they have low needs of external financing or because they strategically want to avoid debt. The study’s main findings for zero-leverage firms are also robust to firms with very low debt (book leverage less than 5%).