Leverage, Investment, and Firm Growth

40 Pages Posted: 11 Nov 2008

See all articles by Larry Lang

Larry Lang

Leonard N. Stern School of Business - Department of Economics

Eli Ofek

New York University (NYU) - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: April 1994

Abstract

This paper documents a negative relation between current leverage and future growth. This relation holds within and across industries, when leverage is assumed to depend directly on future growth, and irrespective of which variables are used to forecast growth. Its economic significance exceeds the economic significance of the relation between cash flow and future growth documented in the literature. It holds for low q firms but not for high q firms or for firms in high q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities but it is negatively related to growth for firms whose growth opportunities are not recognized by the capital markets and for firms whose growth opportunities are not sufficiently valuable to overcome the effects of their debt overhang.

Suggested Citation

Lang, Larry and Ofek, Eli and Stulz, Rene M., Leverage, Investment, and Firm Growth (April 1994). NYU Working Paper No. FIN-94-041, Available at SSRN: https://ssrn.com/abstract=1299487

Larry Lang (Contact Author)

Leonard N. Stern School of Business - Department of Economics

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New York, NY 10003
United States

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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