Does Zero-leverage Policy Increase Inefficient Investment? - From The Perspective Of Lack Of Bank Creditors

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Zhen Huang
Wanli Li
Weiwei Gao


Zero-leverage Policy, Lack of Bank Creditor, Inefficient Investment


Using a sample of up to 12023 firm-year observations across 2358 individual firms from 2007 to 2013, this paper examines whether zero-leverage policy increases firms’ inefficient investment from the perspective of lack of bank creditors. Due to the lack of bank creditor monitoring, zero-leverage policy leads to more serious information asymmetry and agency problems, which are the two types of frictions that affect investment efficiency. The empirical results show that zero-leverage policy indeed increases inefficient investment. Furthermore, we test whether external monitoring helps to mitigate the effects of zero-leverage policy on inefficient investment. Our findings suggest that the sensitivity between zero-leverage policy and inefficient investment will be lower in firms with strong external monitoring. Overall, the zero-leverage policy seems to be a key determinant of inefficient investment.


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