Are the benefits of debt declining? The decreasing propensity of firms to be adequately levered |
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| Institution: | 1. School of Business Administration, 328.09 Prentis, Wayne State University, Detroit, MI 48202, USA;2. Penn State University – Lehigh Valley, Center Valley, PA 18034, USA;1. Lingnan University, Hong Kong, China;2. Shanghai University of Finance and Economics, Shanghai, China;3. China Europe International Business School, Shanghai, China;4. Central University of Finance and Economics, Beijing, China;1. Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824, USA;2. Terry College of Business, University of Georgia, Athens, GA 30602, USA;3. School of Business, University of Kansas, Lawrence, KS 66045, USA |
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| Abstract: | We observe a persistent increase in the percentage of firms with little or no debt in their capital structure over the last three decades. The fraction of firms with less than five percent debt in their capital structure increases from 14.01 percent in 1977 to 34.42 percent in 2010 while the percentage of all-equity firms increases 200 percent over the same period. We find that even after controlling for firm- and industry-specific variables that are relevant to capital structure policy, there is a deficiency in firms' propensity to be levered. Additionally, the deficiency is increasing over time and by 2010 the percent of firms that are nearly all-equity is twice the predicted level. Our findings are robust to different methodologies, specifications, and time periods. Overall, these results suggest that the well-documented benefits of leverage are less valuable over the sample period and that the determinants of firms' capital structure decisions have evolved since the 1970s. |
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