Competition and debt conservatism
Competition and debt conservatism
Exploiting changes in countries’ competition laws, we find that competition increases firms’ propensity to use zero leverage (ZL). We test the financial-flexibility, financial-constraint and quiet-life explanations for this result, concluding that desire for flexibility is the one most likely. The relation between competition and ZL strengthens with cash-flow volatiliy, which supports the flexibility motive. Adoption of ZL by firms is accompanied by increases in payouts, so it is unlikely that ZL adopters are constrained. Proxies for governance have no effect on the relation between competition and ZL, suggesting that desire for a quiet life is not the explanation either.
Zero-Leverage Puzzle, Competition, Competition Law Index, Financial Constraint, Financial Flexibility, Managerial Quiet Life
Armitage, Seth
b19d5eb5-b528-4fac-b7d0-47fdb2381073
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Armitage, Seth
b19d5eb5-b528-4fac-b7d0-47fdb2381073
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Armitage, Seth and Leung, Woon Sau
(2025)
Competition and debt conservatism.
Journal of Financial and Quantitative Analysis.
(In Press)
Abstract
Exploiting changes in countries’ competition laws, we find that competition increases firms’ propensity to use zero leverage (ZL). We test the financial-flexibility, financial-constraint and quiet-life explanations for this result, concluding that desire for flexibility is the one most likely. The relation between competition and ZL strengthens with cash-flow volatiliy, which supports the flexibility motive. Adoption of ZL by firms is accompanied by increases in payouts, so it is unlikely that ZL adopters are constrained. Proxies for governance have no effect on the relation between competition and ZL, suggesting that desire for a quiet life is not the explanation either.
Text
CompetitionZL_final_17Jun2025
- Accepted Manuscript
More information
Accepted/In Press date: 21 June 2025
Keywords:
Zero-Leverage Puzzle, Competition, Competition Law Index, Financial Constraint, Financial Flexibility, Managerial Quiet Life
Identifiers
Local EPrints ID: 503590
URI: http://eprints.soton.ac.uk/id/eprint/503590
ISSN: 0022-1090
PURE UUID: f347782e-9a73-4f72-9cc0-6881b1d6acfb
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Date deposited: 05 Aug 2025 16:59
Last modified: 05 Sep 2025 04:01
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Contributors
Author:
Seth Armitage
Author:
Woon Sau Leung
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