The Mystery of Zero-Leverage Firms

Strebulaev and Yang (working paper, 2013)

A large percentage of publicly-owned U.S. firms (14% in 2000) have zero or almost-zero leverage, and this phenomenon is not confined to just a few years.  Zero leverage as a corporate policy appears to be persistent, and is not explained either by industry or by firm size.

In addition, many zero-leverage firms pay dividends, so it is not the case that this is driven by growth firms choosing zero leverage to avoid paying out earnings.

Compared to similar firms matched on size and industry, zero-leverage firms that pay dividends:

  • pay higher dividends
  • have higher cash balances

One potential explanation is an agency story where the manager prefers zero leverage, even if the shareholders may not.  This story finds support in the empirical findings that zero leverage is more likely in

  • firms with higher CEO ownership
  • firms with less independent or more CEO-friendly boards
  • family-owned firms.