TY - JOUR
T1 - External growth opportunities and a firm's financing policy
AU - Karpavičius, Sigitas
AU - Yu, Fan
PY - 2019
Y1 - 2019
N2 - This study analyzes how external growth opportunities such as general demand growth impact a firm's financing policy. The model developed in this paper implies that a firm's optimal leverage ratio decreases with growth opportunities if the firm's manager is not highly risk-averse, but increases otherwise. The relation is driven by the respective changes in equity value. Our empirical tests show that equity value is greater and that financial leverage is lower for high-growth firms. This suggests that firms' managers are not highly risk-averse, on average. This paper provides an alternative explanation for the negative relation between leverage and growth opportunities.
AB - This study analyzes how external growth opportunities such as general demand growth impact a firm's financing policy. The model developed in this paper implies that a firm's optimal leverage ratio decreases with growth opportunities if the firm's manager is not highly risk-averse, but increases otherwise. The relation is driven by the respective changes in equity value. Our empirical tests show that equity value is greater and that financial leverage is lower for high-growth firms. This suggests that firms' managers are not highly risk-averse, on average. This paper provides an alternative explanation for the negative relation between leverage and growth opportunities.
KW - Capital structure
KW - Growth opportunities
KW - Risk preferences
UR - http://www.scopus.com/inward/record.url?scp=85064704470&partnerID=8YFLogxK
U2 - 10.1016/j.iref.2019.04.007
DO - 10.1016/j.iref.2019.04.007
M3 - Article
SN - 1059-0560
VL - 62
SP - 287
EP - 308
JO - International Review of Economics and Finance
JF - International Review of Economics and Finance
ER -