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Performance of Debt Free Firms

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  • Tarek Zaher

Abstract

This paper compares the performance of portfolios of debt free firms to comparable portfolios of leveraged firms. The results of the study indicate that investments in portfolios of debt free firms tend to generate higher returns than investments in their peer portfolios of leveraged firms over long and short periods. The results have clear implications for investment decisions and investment performance. Investors tend to reward firms that resist the urge to borrow heavily and operate with debt free balance sheets and penalize firms that have high levels of debt. Moreover, during market downturns, debt free firms will not have the additional burden of debt and may be able to recover much faster than companies that carry a debt load over a long period of time, and therefore would outperform leveraged firms. This latter assertion may be retested after the latest international financial crises come to an end.

Suggested Citation

  • Tarek Zaher, 2009. "Performance of Debt Free Firms," NFI Working Papers 2009-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2009-wp-04
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    File URL: http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2009-WP-04_Zaher.pdf
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    References listed on IDEAS

    as
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