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San Diego State University

Fowler College of
Business Administration

Intellectual Contribution

Zero Leverage and The Value in Waiting to Issue Debt
Lotfaliei, B.
Type of Research
Date Published
2014, Before July
Contribution Type
Working paper
This paper addresses the zero-leverage puzzle, the observation that many firms do not issue debt and thus seem to forego sizable debt benefits. By considering the real option of issuing debt, small and risky firms have incentives to postpone debt issuance, even when standard trade-off theory predicts that these firms should have leverage. Thus, the value of debt-free firms should include an option component whose value is derived from future debt issuance benefits. The paper proposes a model of optimal timing for issuing debt and finds empirical support for the model's predictions.