Financial Constraints versus Financial Flexibility: What Drives Zero-Debt Puzzle in Emerging Markets?

Abstract

This study is focused on gaps in the theory of capital structure research regarding the phenomenon of zero-debt behavior. On the sample of firms from 21 countries with emerging capital markets over the period of 2010–2015, we show that the zero-debt policy choice is firstly driven by financial flexibility motive, while financial constraints could be regarded as the second motive. We show that major determinants of the zero-leverage choice are growth opportunities, profitability, business risk and cash holdings. We find that all these firms are smaller, less profitable, riskier and possess high cash holdings. Moreover, we find that macroeconomic conditions have lower influence on the debt policy decision in comparison with corporate determinants.