A Study on the Behavior of Zero-leverage for Companies Listed in China: Financial Constraint or Financial Flexibility?

Abstract

Abstract:

Low debt level and rich cash holding, as two key factors that enterprises relied on to resist the 2008 financial crisis, have the latest research topic in the field of capital structure. This paper tries to explain the behavior of zero-leverage for companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange during 1998 and 2012, from the perspective of financial constraint and financial flexibility. Results show that:(1) the percent of zero-leverage companies increase from 10.7% in 1998 to 31.3% in 2012, which means zero-leverage are more and more popular. (2) the behavior of zero-leverage for companies listed in China is not entirely because of financial constraint and in fact it is a strategic choice made by companies to maintain financial flexibility. This paper explains the reasons why more and more companies choose zero-leverage and how the behavior of zero-leverage affects investment by empirical research. Based on results above, this paper suggests that:given the frequent financial crises and the increasingly short industry life cycle, it important for companies to reduce debt and maintain some reasonable cash holdings to improve financial flexibility and capture potential high-yield investment projects.

Key words: zero-leverage, net debt, financial constraint, financial flexibility

Wang Jinxiang, Wu Yuhui, Wu Shinong. A Study on the Behavior of Zero-leverage for Companies Listed in China: Financial Constraint or Financial Flexibility?[J]. , 2016, 28(6): 32-41.

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