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Zero-Leverage in European Firms: The Role of Corporate Governance Mechanisms on the Phenomenon
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Author(s): Flávio Morais (Department of Management and Economics, CEFAGE, NECE Research Center in Business Sciences, University of Beira Interior, Portugal), Zélia Serrasqueiro (Department of Management and Economics, CEFAGE, University of Beira Interior, Portugal)and Joaquim J. S. Ramalho (Department of Economics, Business Research Unit, Instituto Universitário de Lisboa, Portugal)
Copyright: 2020
Pages: 25
Source title:
Handbook of Research on Accounting and Financial Studies
Source Author(s)/Editor(s): Luís Farinha (University of Beira Interior, Portugal), Ana Baltazar Cruz (School of Management, Polytechnic Institute of Castelo Branco, Portugal)and João Renato Sebastião (Polytechnic Institute of Castelo Branco, Portugal)
DOI: 10.4018/978-1-7998-2136-6.ch011
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Abstract
This study analyzes the zero-leverage phenomenon in a sample of European listed firms for the period 2001-2016, with a focus on the role played by the corporate governance mechanisms on the explanation of the phenomenon. Considering a set of internal and external corporate governance variables, it is rejected that firms with poor internal mechanisms of corporate governance have a greater propensity to adopt zero-leverage policies. Nonetheless, a great ownership concentration—measure for external corporate governance mechanisms—decreases the firm's propensity to be debt-free, indicating that the presence of large shareholders reduces managers' opportunistic actions. Results that partially validate that zero-leverage policies are driven by entrenched managers avoiding the disciplinary power of debt, especially in the presence of small shareholders without incentives and power to control managers' actions. Additionally, zero-leverage firms seem to substitute debt by internal sources of liquidity. Results are robust to different zero-leverage classifications and econometric methods.
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