Question

Why zero-leverage firm exits?

Answer 1

Being a zero-leverage firm means opting for no debt into the capital structure of the firm. There're some characteristics of such firms are as follow - such firms pay higher dividends, are more profitable, pay higher taxes, issue less equity, and have higher cash balances than control firms chosen by industry and size. Firms with higher Chief Executive Officer (CEO) ownership and longer CEO tenure are more likely to have zero debt, especially if boards are smaller and less independent. Family firms are also more likely to be zero-levered, according to a Stanford research.

Though debt has many advantages including tax shield, it exposes the firm to various risks such as interest rate risk, currency risk etc. Such firms, don't wish to have regular interest payment burden can be one of the primary reasons why firms go zero-leverage. Zero-leverage companies are mainly able to post superior performance based on lesser requirements of transparency and lesser chance of loss of control.