Performance of debt free firms
Abstract
Purpose
The purpose of this paper is to find out whether investors tend to reward firms that resist the urge to borrow and operated with debt free balance sheet and penalize firms that have high levels of debt.
Design/methodology/approach
The performance of portfolios of debt free firms are compared to comparable portfolios of leveraged firms. Debt free firms are matched with conventional firms of the same size from the same sector. Two tests of differences in the performance are conducted for a long period and for a short period.
Findings
The results of the study indicate that investments in portfolios of debt free firms tend to generate higher returns than investments in their peers of portfolios of leveraged firms over long and short periods. The results have clear implications on investment decisions and investment performance. Investors tend to reward firms that resist the urge to borrow heavily and operate with debt free balance sheet and penalize firms that have high level of debt.
Originality/value
The results of the study can be of great interest to investors as well as firms specially during periods of financial crises. It raises again the question as to what is the optimal level of debt a firm should have in normal times and during periods of economic or financial crises.
Keywords
Citation
Zaher, T.S. (2010), "Performance of debt free firms", Managerial Finance, Vol. 36 No. 6, pp. 491-501. https://doi.org/10.1108/03074351011042973
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited