Why Do Some Firms Go Debt-Free?

Asia-Pacific Journal of Financial Studies 41, 2013

39 Pages Posted: 18 Mar 2006 Last revised: 15 Jun 2014

Soku Byoun

Baylor University

Zhaoxia Xu

New York University

Date Written: January 15, 2013


This paper examines debt-free firms. We find that favorable equity market valuation and borrowing constraints contribute to these firms’ extreme debt conservatism. Small debt-free firms with little access to credit markets are seen to raise equity while paying high dividends. Large debt-free firms, generating more cash flows relative to their investment needs, often pay off their debt while paying high dividends. The results suggest that high dividends for small debt-free firms help them establish good reputations in equity markets, while high dividends for large debt-free firms reduce the agency costs of free cash flow.

Keywords: capital structure, debt-free capital structure, dividend policy

JEL Classification: G32

Suggested Citation

Byoun, Soku and Xu, Zhaoxia, Why Do Some Firms Go Debt-Free? (January 15, 2013). Asia-Pacific Journal of Financial Studies 41, 2013. Available at SSRN: https://ssrn.com/abstract=891346 or http://dx.doi.org/10.2139/ssrn.891346

Soku Byoun (Contact Author)

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Zhaoxia Xu

New York University ( email )

New York, NY 11201
United States

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