Growth Opportunities and Corporate Debt Policy: The Case of the U.S. Defense Industry

41 Pages Posted: 10 Jun 2002 Last revised: 25 Jul 2014

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Kenneth Lehn

University of Pittsburgh - Finance Group

Stanko Racic

University of Pittsburgh - Katz Graduate School of Business

Date Written: May 3, 2001

Abstract

The U.S. defense industry provides a natural experiment for examining how changes in growth opportunities affect the level and structure of corporate debt. Compared with other firms, the growth opportunities of defense firms increased substantially during the Reagan defense buildup of the early 1980s, but then declined significantly with the end of the cold war and associated defense budget cuts in the late 1980s and early 1990s. We examine how the level and structure of corporate debt changed for a sample of 61 defense firms and a benchmark sample of 61 manufacturing firms during 1980-1995, a period spanning the changes in growth opportunities. The debt levels of weapons manufacturers, which were most affected by the changes in growth opportunities, increased significantly as their growth opportunities declined. In addition, these firms lengthened the maturity structure of their debt, decreased the ratio of private to public debt, and decreased the use of senior debt as their growth opportunities declined. The results complement other studies that have found cross-sectional relations between proxies for growth opportunities and leverage variables and validate the prominent role played by growth opportunities in the theory of corporate finance.

Keywords: Growth opportunities, debt policy, maturity structure, defense industry

JEL Classification: G32

Suggested Citation

Goyal, Vidhan K. and Lehn, Kenneth and Racic, Stanko, Growth Opportunities and Corporate Debt Policy: The Case of the U.S. Defense Industry (May 3, 2001). Journal of Financial Economics, Vol. 64, No. 1, April 2002. Available at SSRN: https://ssrn.com/abstract=310480

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Kenneth Lehn

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-2034 (Phone)

Stanko Racic

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1526 (Phone)

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