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The long‐run equity performance of zero‐leverage firms

Hongbok Lee (Department of Accounting and Finance, Western Illinois University, Macomb, Illinois, USA)
Gisung Moon (Department of Accounting and Finance, Columbus State University, Columbus, Georgia, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 30 August 2011




This paper aims to contribute to the existing finance literature on capital structure by examining the long‐run equity performance of the firms that employ extremely conservative debt policy – zero leverage for three or five consecutive years.


This paper measures the long‐run equity performance of zero‐debt firms with two commonly used methods: the buy‐and‐hold abnormal returns following Barber and Lyon, and the Fama and French three‐factor models. The four‐factor models are also used to check the robustness of the result.


The authors find that zero‐debt firms perform better over the long run based on the calendar‐time portfolio regressions after adjusting for Fama‐French factors. The results indicate that the persistent lack of debt in the capital structure seems an important determinant of stock returns, and the impact of extreme conservatism in debt policy is not fully captured by the theoretical and empirical risk proxies, such as beta, size, book‐to‐market, and momentum.

Practical implications

The benefit of the present article for investors and portfolio managers is the identification of an additional important determinant of stock returns.


This paper is the first article that thoroughly investigates the long‐run stock returns of the firms that choose to stay debt free over an extended period of time.



Lee, H. and Moon, G. (2011), "The long‐run equity performance of zero‐leverage firms", Managerial Finance, Vol. 37 No. 10, pp. 872-889.



Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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