An Analysis of Joint Effects of Investment Opportunity Set, Free Cash Flows and Size on Corporate Debt Policy

Posted: 16 May 1998

See all articles by Bikki Jaggi

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Ferdinand A. Gul

Monash University Sunway Campus

Date Written: Undated

Abstract

This study examines the association between IOS, FCF, size and debt on the basis of a sample of 1869 observations from 1989 to 1993 for non-regulated U.S. firms. Three principal findings emerge from this study. First, there is a significant positive association between FCF and debt level for firms with low IOS, thus providing support for Jensen's "control hypothesis". Second, the negative association between high IOS and debt as suggested in the literature is significant for small firms only, which means that small firms are likely to finance their growth more with equity capital than debt. Third, we find some support for the expectation that the positive association between debt and high FCF for low IOS firms is more pronounced for large firms. The implications of these results are also discussed.

JEL Classification: G32, D82

Suggested Citation

Jaggi, Bikki and Gul, Ferdinand A., An Analysis of Joint Effects of Investment Opportunity Set, Free Cash Flows and Size on Corporate Debt Policy (Undated). Available at SSRN: https://ssrn.com/abstract=2682

Bikki Jaggi (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

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