Zero-debt capital structure and the firm life cycle: empirical evidence from privately held SMEs

ABSTRACT

Recent research on firms’ capital structure highlights that up to 25% of publicly listed firms are zero-debt firms, a stylized fact that challenges financial theory. In this paper, we study privately held zero-debt small and medium-sized enterprises (SMEs) and identify that approximately 20% of our observations correspond to zero-debt firms. This result is especially surprising in the context of a bank-oriented economy, France. We show that the likelihood of being a zero-debt firm is higher when firms are new-born, which is not surprising, but also when they grow older. In other words, we observe a U-shaped relationship between age and the likelihood of being a zero-debt firm. Our results are consistent with the idea that new-born firms cannot access debt-financing because of a lack of reputation and high informational opacity. When firms grow older, they decide to become debt-free to preserve their financial flexibility and to reduce their dependency toward banks. Overall, this paper suggests that SMEs depend less on bank financing than currently assumed.

KEYWORDS:

• Zero-debt firms
• capital structure
• small and medium-sized firms
• financial life cycle

Acknowledgments

Funding from the European Regional Development Fund and the Réseau de Recherche et Expertise en Entrepreneuriat is gratefully acknowledged. The constructive coments of two anonymous reviewers is gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The French income tax rate was 33.33% until the 2017 and reduced to 31% since 2018, making it one of the highest statutory corporate income tax rates in the OECD (OECD 2020).

2. We thank an anonymous reviewer for this point.

3. We use the statistical software Stata 16 and the “utest” command.

4. Following the recommendations of Haans, Pieters, and He (2016), we test for the presence of a cubic relationship between age and the likelihood of being a ZDF. The cubic age term is not statistically significant in any of our regressions.

Additional information

Funding

This work was supported by the European Regional Development Fund.