Unanticipated Growth, Tobin’s Q, and Leverage

BRIDGING THE GAAP: RECENT ADVANCES IN FINANCE AND ACCOUNTING, I. Venezia and Z. Weiner eds., World Scientific Publishing, September 2011

Posted: 25 Nov 2011

See all articles by Varouj A. Aivazian

Varouj A. Aivazian

University of Toronto - Rotman School of Management

Jeffrey L. Callen

University of Toronto - Rotman School of Management

David Gelb

Seton Hall University - Accounting

Date Written: September 24, 2011

Abstract

This study examines (leverage) underinvestment and overinvestment hypotheses, taking into account whether growth is anticipated or unanticipated and controlling for potential reverse causality. This study sheds light on the following question: Does financial leverage affect the firm’s ability to capture industry-wide growth opportunities? Overall, high leverage always appears to be harmful to firm value whether growth is anticipated or not. We also examine if research and development (R&D) intensity mediates the relationship between financial leverage and firm value. We find that the adverse effects of debt on firm performance are much more severe for firms with higher R&D expenditures, irrespective of whether growth opportunities are anticipated or unanticipated. We further investigate the effect of industry competition on the firm’s ability to exploit industry-wide growth opportunities in the presence of financial leverage. We find that higher levels of debt appear to adversely affect the productivity of firms operating primarily in less concentrated product markets.

Suggested Citation

Aivazian, Varouj A. and Callen, Jeffrey L. and Gelb, David S., Unanticipated Growth, Tobin’s Q, and Leverage (September 24, 2011). BRIDGING THE GAAP: RECENT ADVANCES IN FINANCE AND ACCOUNTING, I. Venezia and Z. Weiner eds., World Scientific Publishing, September 2011. Available at SSRN: https://ssrn.com/abstract=1964387

Varouj A. Aivazian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Department of Economics
Toronto, Ontario M5S 3E6
Canada
416-978-2375 (Phone)
416-978-5433 (Fax)

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

David S. Gelb

Seton Hall University - Accounting ( email )

400 South Orange Avenue
South Orange, NJ 07079
United States
973-761-9235 (Phone)
973-761-9217 (Fax)

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