Zero Leverage and The Value in Waiting to Issue Debt
Lotfaliei, Babak. 2018. “Zero Leverage and the Value in Waiting to Have Debt.” Journal of Banking and Finance 97: 335–49. DoI: 10.1016/j.jbankfin.2018.09.010
80 Pages Posted: 1 Oct 2013 Last revised: 25 Nov 2018
Date Written: September 10, 2018
This article documents that the real option to have debt motivates some firms to remain debt-free, even when standard trade-off theory predicts that these firms should have leverage. The real option has a first-order effect similar to bankruptcy costs in addressing the zero-leverage puzzle, the observation that many firms seemingly forgo sizable debt benefits by remaining debt-free. The debt-free firms' value includes the option whose value is derived from future debt benefits and hedging bankruptcy costs. This article proposes an optimal timing model for having debt and finds support for the model's predictions through simulations and empirical analysis.
Keywords: Zero leverage, Real option, Optimal capital structure
JEL Classification: G32
Suggested Citation: Suggested Citation