Financial constraints versus financial flexibility: What drives zero-debt puzzle in emerging markets?
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.