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External growth opportunities and a firm's financing policy

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  • Karpavičius, Sigitas
  • Yu, Fan

Abstract

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.

Suggested Citation

  • Karpavičius, Sigitas & Yu, Fan, 2019. "External growth opportunities and a firm's financing policy," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 287-308.
    • Handle: RePEc:eee:reveco:v:62:y:2019:i:c:p:287-308
    DOI: 10.1016/j.iref.2019.04.007
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    More about this item

    Keywords

    Capital structure; Growth opportunities; Risk preferences;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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