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

Journal of Banking and Finance, Vol. 97, 2018

80 Pages Posted: 1 Oct 2013 Last revised: 25 Nov 2018

See all articles by Babak Lotfaliei

Babak Lotfaliei

Finance Department, San Diego State University

Date Written: September 10, 2018

Abstract

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

Lotfaliei, Babak, Zero Leverage and The Value in Waiting to Issue Debt (September 10, 2018). 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 ; Journal of Banking and Finance, Vol. 97, 2018. Available at SSRN: https://ssrn.com/abstract=2333741 or http://dx.doi.org/10.2139/ssrn.2333741

Babak Lotfaliei (Contact Author)

Finance Department, San Diego State University ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States
+16195944790 (Phone)

HOME PAGE: http://cbaweb.sdsu.edu/faculty/profile/Babak-Lotfaliei

Register to save articles to
your library

Register

Paper statistics

Downloads
138
Abstract Views
762
rank
214,206
PlumX Metrics