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- The puzzling phenomenon of zero-leverage firms: Characteristics and performance of unlevered firmsPublication . Morais, Flávio Daniel Correia; Teixeira, Zélia Maria da Silva Serraqueiro; Ramalho, Joaquim José dos SantosLong is the discussion about firm’s capital structure decisions. The pioneering study by Modigliani and Miller (1958) based on the assumption of a perfect capital market represents the common point to all theories that have been developed and still applied today to the field of capital structure decisions. Whether by bringing tax benefits (trade-off theory), by reducing information asymmetries (pecking order theory), by contributing to the reduction of agency conflicts between shareholders and managers (agency theory) or by signalling good firm’s prospects and the existence of value creating projects (signalling theory), the classical theories of capital structure focus on the existence of debt and its benefits over equity financing. Also, previous empirical studies focus on the existence of debt and, overall, investigate the motives that lead companies to have higher or lower debt levels. Therefore, the central axis of this extensive field of research is Debt, the existence of debt being assumed to be something natural and until a sustainable level beneficial to firms. However, the last decade has been marked by the finding that a considerable number of firms does not hold any amount of debt in their capital structure, with an increasing trend towards the emergence of debt-free firms. This phenomenon known as the “mysterious of zero leverage” or the “zero-leverage puzzle” contradicts classical theories of capital structure, which has aroused the interest of the scientific community, being considered a fertile topic for further research. In order to explore the phenomenon of zero leverage and increase our knowledge about an unexpected and puzzling financing policy that has become a trend in recent years, this thesis is composed by 5 empirical articles that explore a sample of listed firms from 14 European countries. The main purpose of this thesis is to examine what motivates firms to be debt-free and the effects on their performance by following an extremely conservative financing policy. The first paper included in this Ph.D. thesis (CHAPTER 3) has the title “The zero-leverage phenomenon in European listed firms: a financing decision or an imposition of the financial market?”. Recognizing that zero leverage can arise from the creditor’s imposition who do not wish to grant credit, as suggested by the financial constraints approach, or by firm’s own financial decision, as suggested by the financial flexibility approach, this paper has as first goal to examine whether zero leverage in the European context can be explained by any of these theoretical approaches. Next, it is our intention to analyse the role played by country-specific characteristics and the 2008 global financial crisis on the zero-leverage phenomenon. Finally, it is proposed to examine whether financing flexibility and financing constraints motives for zero leverage are dependent or not of the country and/or macroeconomic conditions. The results from several models that consider the binary nature of our dependent variable show that in the European context there are two types of zero-leverage firms: financially constrained firms that are unable to get any funding; and financially unconstrained firms, which maintain zero leverage by choice. Also, the European financial and sovereign debt crises increased the propensity for zero leverage only for market-based countries, since no significant changes occurred in bank-based countries. Finally, the relevance of the financial flexibility approach (zero leverage by firm’s decision) is higher in market-based systems and that the financial constraints approach did not gain importance with the 2008 crisis. The second paper included in this Ph.D. thesis (CHAPTER 4) has the title “The heterogeneous effect of governance mechanisms on zero-leverage phenomenon across financial systems”. Recognizing that zero debt can be the consequence of opportunistic managers that aim to increase their private benefit, this paper analyses the effect of governance mechanisms on zero debt. Particularly, it is our aim to examine the effect of firm- and country-specific governance mechanisms on the propensity for firms having zero leverage. Finally, it is our intention to analyse whether their effects vary or not across different financial systems. The results show that the impact of country-specific governance mechanisms on zero leverage differs across financial systems, with stronger national governance mechanisms increasing (decreasing) the propensity for zero leverage in bank(market)-based countries. Additionally, the firm’s ownership concentration only impacts significantly the zero-leverage phenomenon in bank-based countries, while board dimension and independency do not impact it. The third paper included in this Ph.D. thesis (CHAPTER 5) has the title “The zero-leverage phenomenon: A bivariate probit with partial observability approach” and using bivariate probit models with partial observability aims to examine the factors that affect the demand for debt and the supply of debt. The regression model used allows us to provide empirical evidence on the determinants of the firm decisions on whether or not to resort to debt and creditor decisions on whether or not to concede debt to firms. Results show that some variables may influence in opposite directions debt demand and supply. For example, although more profitable firms have lower propensity to resort to debt by their own decision, it is to these firms that creditors are more willing to grant debt. Therefore, zero leverage in most profitable firms arises from firm’s own decision and not by creditors imposition. Another highlight is the fact that tangibility does not affect firms’ demand for debt, but creditors are more prone to grant debt to firms with greater asset tangibility, thus decreasing the propensity for zero leverage by creditor-related reasons. Conversely, the recent European crises decrease the demand for debt but did not affect their supply, thus the recent European crises increase the propensity for zero leverage only by firms’ own decision. The fourth paper included in this Ph.D thesis (CHAPTER 6) has the title “Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms”. As established by the dynamic trade-off theory, firms actively adjust to a target level of debt, thus this paper aims to investigate whether firms classified as zero leverage adjust or not to a target debt ratio and, if they do, how fast they do it. Several comparative analyses are carried out between zero-leverage firms and leveraged firms. Overall, results show that zero-leverage firms adjust to a target level of debt but present an annual speed of adjustment significantly slower than the exhibited by leveraged firms. In addition, both zero-leverage and leveraged firms present a greater speed of adjustment in market-based financial systems. Finally, it is found that zero-leverage firms increased significantly their speed of adjustment during the 2008 financial crisis even exceeding the speed of adjustment of leveraged firms. The fifth paper included in this Ph.D thesis (CHAPTER 7), has the title “To be or not to be debt-free, which is the optimal answer for a better firm performance?”. This paper aims to examine the impact of zero-leverage policies on the firm’s financial performance. Empirical results show that zero-leverage policies significantly increase the firm’s performance, this effect being even stronger during the 2008 global financial crisis. The positive effect of zero debt on firm’s performance is observed for both financially unconstrained and constrained firms. However, the estimated stronger positive effect of zero leverage on firm’s performance during crisis periods only holds for the group of financially unconstrained firms.
- Determinants of cash holdings in the accommodation industry: evidence from Southerm European CountriesPublication . Morais, Flávio Daniel Correia; Silva, Pedro Miguel Ramos Marques daThis study analyzes the determinants of cash holdings for the accommodation industry in Southern European countries (Spain, Greece, Italy and Portugal) using a sample of 5964 firms during the period 2003-2011. A fixed-effects panel data model revealed that larger companies, higher leveraged, where most debt is short-term and that maintain better relationships with financial institutions exhibit lower cash to assets ratios. Liquid assets substitutes, capital expenditures and asset tangibility also have a negative effect on cash levels. As expected, cash holdings are positively influenced by cash-flow and cash-flow volatility. The results reveal the negative and significant impact of the 2008 financial crisis on cash holdings in the sector, which at the end of 2011 had not yet returned to pre-crisis levels. Empirical results reject the generalized argument put forward, over more than a decade, to explain high cash holdings and its trend to rise until the crisis, emphasizing the little importance of the precautionary motive as an incentive to accumulate cash.
- The zero-leverage phenomenon in European listed firms: A financing decision or an imposition of the financial market?Publication . Morais, Flávio; Serrasqueiro, Zélia; Ramalho, JoaquimThis article provides empirical evidence on the zero-leverage phenomenon for a sample of European listed firms for the period 1995–2016. It is shown that there are two types of firms with zero leverage: the financially constrained firms that face obstacles in obtaining external finance, as predicted by the financial constraints hypothesis; and the financially unconstrained firms that maintain zero leverage as a consequence of a financing decision, which supports the financial flexibility hypothesis. The zero-leverage phenomenon is also influenced by the financial system that prevails in each country, being boosted (inhibited) in market-based (bank-based) financial systems, and by the country’s macroeconomic conditions, with the recent financial and sovereign debt crises increasing the propensity for zero leverage in market-based countries. We also find that the financial flexibility hypothesis seems to be more important in market-based systems and that the financial constraints approach did not gain importance during the crisis period. Our results are robust to the use of alternative measures of debt conservatism, explanatory variables, and econometric methods and maintain their validity when we allow for endogeneity in firm size and dividend payments.