| Summary: | This thesis investigates a puzzling finding in capital structure literature. A large proportion of firms absolutely eschew debt financing, leaving a substantial fraction of their value on the table by not taking the tax benefit. This phenomenon is becoming increasingly prevalent around the world.
This thesis consists of three studies. Motivated by the literature on innovation, the first study investigates the effect of R&D on zero-leverage behaviour and shows that zero-leverage firms are concentrated in R&D firms. The differencein-differences analysis using the implementation of state R&D tax credit also confirms the causal effect of R&D on the zero-leverage decision. The results suggest that the unique characteristics of R&D investment impede access to debt financing, resulting in a high probability of being zero-levered. Further analysis suggests that the strengthening sensitivity of the zero-leverage decision to R&D investments has more explanatory power than the rising trend of R&D investments on the trend of the zero-leverage puzzle.
The second study complements the first by linking product market competition to the zero-leverage puzzle. The results show that high market competition increases the probability of being unlevered. The difference-in-differences analysis using large tariff reduction also confirms the causal effect of market competition on zero-levered behaviour. Further evidence shows that market competition influences the zero-leverage decision through R&D investments. The results imply that high market competition increases firms’ innovation incentive to achieve competitiveness, resulting in the high likelihood of becoming unlevered.
The final study investigates the equity financing of zero-leverage firms. Motivated by the conflicted prediction of the pecking order theory on zeroleverage firms’ financing choices, the third study tests whether market timing theory can explain the zero-leverage puzzle. Consistent with the theory, favourable market timing conditions increase the probability of being zerolevered. The difference-in-differences analysis using the technology bubble also confirms the causal effect of market timing conditions on the zero-leverage decision. Further analysis suggests that firms in favourable market timing conditions eschew debt financing because low information asymmetry reduces the cost of equity. The third study also shows that the motive of zero-leverage firms’ equity issuance is cash saving rather than the pressure of short-term cash needs. Overall, this thesis provides new insights into the zero-leverage phenomenon from the perspectives of innovation, market competition, and equity financing.
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