An Empirical Analysis of Zero-Leverage and Ultra-Low Leverage Firms: Some U.K. Evidence

This paper studies conservative debt policies, focusing on firms with no debt (zeroleverage)or with extremely low debt. Examining an unbalanced panel of U.K. firms,we show that debt conservatism is a common, persistent yet puzzling empiricalregularity: nearly 10% of U.K. firms have zero leverage and 18% have marketleverage of less than or equal to 1% (ultra-low leverage). Firms maintaining zeroleverageor ultra-low leverage are generally smaller, younger, and less profitable buthave a higher payout ratio. These firms also have substantial cash reserves and relyheavily on equity financing in order to mitigate underinvestment incentives. Firmswith high-growth opportunities are more likely to adopt and switch to an extremelyconservative debt policy....