Zero-Debt Policy under Asymmetric Information, Flexibility and Free Cash Flow Considerations

摘要

We build a model of debt for firms with investment projects, for which flexibility and freecash flow problems are important issues. We focus on the factors that lead the firm to select thezero-debt policy. Our model provides an explanation of the so-called “zero-leverage puzzle”. It alsohelps to explain why zero-debt firms often pay higher dividends when compared to other firms.In addition, the model generates new empirical predictions that have not yet been tested. For example,it predicts that firms with zero-debt policy should be influenced by free cash flow considerationsmore than by bankruptcy cost considerations. Additionally, the choice of zero-debt policy can be usedby high-quality firms to signal their quality. This is in contrast to most traditional signalling literaturewhere debt serves as a signal of quality. The model can explain why the probability of selectingthe zero-debt policy is positively correlated with profitability and investment size and negativelycorrelated with the tax rate. It also predicts that firms that are farther away from their target capitalstructures are less likely to select the zero-debt policy when compared to firms that are close to theirtarget levels.