Empirical Study On Long-Run Equity Performance Of Zero-Leverage Firms

With the rapid development of gobal economy,the situation of enterprise financing is becoming more and more complicated,and the capital structure theory also makes different change in different periods.The two classical capital structure theories,which also are widely recognized by experts and scholars,are optimal trade-off theory and financing order theory.They all agreed that enterprise should select debt financing in the first place.However,some scholars have found that there are a large number of zero(low)-leverage companies in the developed capital market of G-7 led by the USA in recent years,and the experts also carried out a series of studies around this zero(low)leverage phenomenon.The aim is to uncover the veil behind this phenomenon.Most of these studies remain at the financial analysis,but the analysis of zero(low)-leverage companies are very rare from the perspective of market performance and especially in the case of continuous zero(low)-leverage.At the same time,as the Chinese economy enters a "new normal",facing rising corporate debts and growing financial risks,the government put forward the strategy of structural reform of the supply in time,and proposed to deleverage as the top priority.However,these policies,which have been formulated for the sustainable development of enterprises by central government,are still lack of empirical support.Based on the annual financial data of all A-Share companies in Shanghai and Shenzhen Stock markets during the period from 1992 to 2015,the paper deeply studies the current situation and financial characteristics of the zero(low)-leverage companies,and preliminarily discuss the influence of debt financing decision on company value and excess return.The results show that,similar to western developed capital markets,zero(low)-leverage phenomenon exists in China's capital market,and the percent of zero(low)-leverage phenomenon has continuously increasing for an extended period of time in Chinese A-share market.In the regional distribution,this phenomenon is more prominent in the eastern region.In addition,although zero(low)leveraged companies are widely distributed in all industries,there are still an industryt-specific phenomenon.Beyond that,those firms also show small,young,more market-to-book,conservative investment and better profitability.Further studies find that the debt financing will inhibition to the current or next value of the enterprise,but it will help to improve the next stock abnormal return.On this basis,combined with monthly stock returns data,the paper empirically analysis the long-run equity performance of zero(low)-leverage firms or investment portfolios with two commonly used methods: event study method and calendar-time portfolio regressions.The findings show that those firms or investment portfolios for at least three(five)consecutive years have more significant long-run abnormal returns compared with the matching firms both in the market value matching or in the market-to-book matching.It also reflects that the return of extreme conservatism in debt policy is not fully captured by the theoretical and empirical risk factors,such as beta,size,book-to-market,and momentum.The results also indirectly indicate that the persistent extreme lack of debt in capital structure seems an important effect on the stock returns.In brief,this paper takes the companies for zero(low)-leverage at the least three or five consecutive years as primary sample since the establishment of the capital market,and combines with their financial characteristics data and monthly stock returns data.The paper deeply analyzes the zero(low)-leverage phenomenon and the long-run equity performance of those firms in China.The empirical conclusions are beneficial to solve the mystery of zero(low)-leverage firms,further enrich the theory and literature of capital structure.In addition,the research also support to the deleverage policy from an empirical perspective,provide a reference for enterprises' future financing policy and have a practical significance for investment behavior of the majority of investors.