Leverage and investment opportunities: the effect on high growth firms
ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Alth...
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| Format: | Article |
| Language: | English |
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Universidade de São Paulo
2019-12-01
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| Series: | Revista Contabilidade & Finanças |
| Subjects: | |
| Online Access: | http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1519-70772020000200302&tlng=pt |
| _version_ | 1818368102160662528 |
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| author | Rossimar Laura Oliveira Eduardo Kazuo Kayo |
| author_facet | Rossimar Laura Oliveira Eduardo Kazuo Kayo |
| author_sort | Rossimar Laura Oliveira |
| collection | DOAJ |
| description | ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Although the relationship between growth opportunities (e.g., Tobin’s Q) and capital structure has already been widely discussed from a conceptual viewpoint, there are still important empirical gaps, particularly due to the endogeneity of the first variable. This paper seeks to minimize these problems by operationalizing the concept of idiosyncratic technological shocks. This issue is relevant because the negative relationship between growth and leverage may indicate that for the most efficient companies there will be a reduction in bankruptcy cost and a reduction in agency costs for the least efficient companies. This paper contributes to the development of studies in the area by demonstrating the inverse relationship between growth and leverage, with the model and the variable that represents the positive shocks experienced by companies. The dynamic panel method enables an analysis of the variation in debt in relation to the variation in value using the first differences and controlling the lagged debt effect. To apply the model, we used data from Brazilian companies, covering 1995 to 2016. The main results show that the greater the ratio between the firm’s growth opportunities and its industry growth opportunities, the lower its leverage indicators. The complementary results suggest that less leveraged firms have this negative relationship to an even stronger degree. |
| first_indexed | 2024-12-13T23:02:36Z |
| format | Article |
| id | doaj.art-1af6c661517b4c99824ece7d4bc6c7c9 |
| institution | Directory Open Access Journal |
| issn | 1808-057X |
| language | English |
| last_indexed | 2024-12-13T23:02:36Z |
| publishDate | 2019-12-01 |
| publisher | Universidade de São Paulo |
| record_format | Article |
| series | Revista Contabilidade & Finanças |
| spelling | doaj.art-1af6c661517b4c99824ece7d4bc6c7c92022-12-21T23:28:22ZengUniversidade de São PauloRevista Contabilidade & Finanças1808-057X2019-12-01318330231710.1590/1808-057x201909140Leverage and investment opportunities: the effect on high growth firmsRossimar Laura Oliveirahttps://orcid.org/0000-0002-2632-8288Eduardo Kazuo Kayohttps://orcid.org/0000-0003-1027-8746ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Although the relationship between growth opportunities (e.g., Tobin’s Q) and capital structure has already been widely discussed from a conceptual viewpoint, there are still important empirical gaps, particularly due to the endogeneity of the first variable. This paper seeks to minimize these problems by operationalizing the concept of idiosyncratic technological shocks. This issue is relevant because the negative relationship between growth and leverage may indicate that for the most efficient companies there will be a reduction in bankruptcy cost and a reduction in agency costs for the least efficient companies. This paper contributes to the development of studies in the area by demonstrating the inverse relationship between growth and leverage, with the model and the variable that represents the positive shocks experienced by companies. The dynamic panel method enables an analysis of the variation in debt in relation to the variation in value using the first differences and controlling the lagged debt effect. To apply the model, we used data from Brazilian companies, covering 1995 to 2016. The main results show that the greater the ratio between the firm’s growth opportunities and its industry growth opportunities, the lower its leverage indicators. The complementary results suggest that less leveraged firms have this negative relationship to an even stronger degree.http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1519-70772020000200302&tlng=ptcapital structureinvestment opportunitiesindustry |
| spellingShingle | Rossimar Laura Oliveira Eduardo Kazuo Kayo Leverage and investment opportunities: the effect on high growth firms Revista Contabilidade & Finanças capital structure investment opportunities industry |
| title | Leverage and investment opportunities: the effect on high growth firms |
| title_full | Leverage and investment opportunities: the effect on high growth firms |
| title_fullStr | Leverage and investment opportunities: the effect on high growth firms |
| title_full_unstemmed | Leverage and investment opportunities: the effect on high growth firms |
| title_short | Leverage and investment opportunities: the effect on high growth firms |
| title_sort | leverage and investment opportunities the effect on high growth firms |
| topic | capital structure investment opportunities industry |
| url | http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1519-70772020000200302&tlng=pt |
| work_keys_str_mv | AT rossimarlauraoliveira leverageandinvestmentopportunitiestheeffectonhighgrowthfirms AT eduardokazuokayo leverageandinvestmentopportunitiestheeffectonhighgrowthfirms |