The Puzzle of Zero-Leverage and Low-Leverage Capital Structure of Companies in the Emerging Capital Markets: Performance of Unlevered Firms during Economic Crisis and Periods of Economic Growth

The paper aims to fulfill existing gap in the corporate finance literature which is related to the free-debt firms’ puzzle. The share of these companies is detected to increase gradually in time and accounts for significant part of listed companies, but it could not be explained by two leading capital structure theories, as the trade-off theory and the pecking order theory. In contrast to previous investigations of this puzzle, this study considers such capital structure not as the forced choice, but as a strategic policy directed to the increase in firms’ performance. The proposed idea is studied on the sample of emerging markets, BRIC countries (Brazil, Russia, India and China), during the period 2007-2014, which allows to test hypotheses in the crisis periods and periods of economic growth. Major results (especially for China and India sample) demonstrate the outperformance of zero-leverage and low-levered companies during economic growth periods according to such measures of performance as EBITDA to total assets ratio, ROA, ROE, ROI, and dividend ratio. At the same time the relative performance of these companies during crisis is still arguable question, as controversy in results is detected.