Why do some firms go debt free?

Soku Byoun, Zhaoxia Xu

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1-38
Number of pages38
JournalAsia-Pacific Journal of Financial Studies
Volume42
Issue number1
DOIs
StatePublished - Feb 2013

Fingerprint

Debt
Dividends
Equity markets
Cash flow
Free cash flow
Access to credit
Borrowing constraints
Conservatism
Agency costs
Equity
Market valuation
Credit markets

Keywords

  • Capital structure
  • Dividend policy
  • Zero debt

ASJC Scopus subject areas

  • Finance

Cite this

Why do some firms go debt free? / Byoun, Soku; Xu, Zhaoxia.

In: Asia-Pacific Journal of Financial Studies, Vol. 42, No. 1, 02.2013, p. 1-38.

Research output: Contribution to journalArticle

Byoun, Soku ; Xu, Zhaoxia. / Why do some firms go debt free?. In: Asia-Pacific Journal of Financial Studies. 2013 ; Vol. 42, No. 1. pp. 1-38.
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