Demand Uncertainty and Zero-leverage Firms

This study explores how demand uncertainty influences a firm to become zero-leverage or almost zero-leverage in main industries of the USA. The data is taken from Thomson Reuters Datastream over the period of 1990-2017 and includes internal classification by 87 industries. First of all, empirical findings prove that demand uncertainty of industry has a high impact on probability of a firm to maintain extremely low levels of debt. Secondly, the list of industries with calculated demand uncertainty and average proportions of these firms is provided. Demand uncertainty has a high positive impact on proportion of zero-leverage and almost zero-leverage firms. Thirdly, interaction of demand uncertainty with market-to-book ratio and profitability is considered. Interaction of low uncertainty of industry demand with market-to-book ratio influences probability of a firm to completely retain from debt and interaction of high demand uncertainty with profitability ratio has a significant impact on probability of a firm to become zero-leverage. Finally, endogeneity of demand uncertainty is considered. The current paper would extend the existing research by investigating that demand uncertainty influences a firm to maintain debt at extremely low levels and provides recommendations for further research.