Abstract
ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Although the relationship between growth opportunities (e.g., Tobin’s Q) and capital structure has already been widely discussed from a conceptual viewpoint, there are still important empirical gaps, particularly due to the endogeneity of the first variable. This paper seeks to minimize these problems by operationalizing the concept of idiosyncratic technological shocks. This issue is relevant because the negative relationship between growth and leverage may indicate that for the most efficient companies there will be a reduction in bankruptcy cost and a reduction in agency costs for the least efficient companies. This paper contributes to the development of studies in the area by demonstrating the inverse relationship between growth and leverage, with the model and the variable that represents the positive shocks experienced by companies. The dynamic panel method enables an analysis of the variation in debt in relation to the variation in value using the first differences and controlling the lagged debt effect. To apply the model, we used data from Brazilian companies, covering 1995 to 2016. The main results show that the greater the ratio between the firm’s growth opportunities and its industry growth opportunities, the lower its leverage indicators. The complementary results suggest that less leveraged firms have this negative relationship to an even stronger degree.
Highlights
The idea that the choice of capital structure is a tradeoff between the tax benefits and the bankruptcy and agency costs and that there is a combination of these two factors that would maximize the firm’s value is widespread, but the different studies have not yet reached a conclusion that fits all cases
The aim of this study is to investigate if the high growth of a firm results in a reduction in its level of debt
This is expected to occur for firms that experience a positive idiosyncratic shock to their growth opportunities, affecting their cash flow and profitability
Summary
The idea that the choice of capital structure is a tradeoff between the tax benefits and the bankruptcy and agency costs and that there is a combination of these two factors that would maximize the firm’s value is widespread, but the different studies have not yet reached a conclusion that fits all cases. This remains a relevant question, as a mistaken financial decision can cost a company’s survival in the market. A positive value greater than 1 in this ratio may indicate that the firm experienced positive individual shocks and had investment opportunities that the other companies in the sector did not
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