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Asian Review of Financial Research, Vol., No..
pp.123~144
pp.123~144
Financial Life Cycle and Capital Structure
Jungwon Suh College of Business Administration, Ewha Womans University, Seoul, Korea,
In this study, I present evidence of a distinctive inverted-U-shaped relation between leverage and financial life cycle stage. By using the magnitude of retained earnings (RE) as a proxy for a firm¡¯s life cycle stage, I find that the debt-to-equity ratio tends to be low for low-RE firms, high for medium-RE firms, and low for high-RE firms in all seven major countries under study. My evidence suggests that (i) early-stage firms have low leverage because they rely mostly on equity financing as a result of financial constraints, (ii) growth-stage firms have high leverage because they actively use debt to meet funding requirements for growth, and (iii) mature- stage firms have low leverage because they passively accumulate internal equity. Finally, it appears that this inverted-U-shaped relation is related to the free-cash-flow problem for high-RE firms in that, despite relatively slow growth prospects, those firms engage in heavy capital investments using large operating cash flows.
Jungwon Suh
In this study, I present evidence of a distinctive inverted-U-shaped relation between leverage and financial life cycle stage. By using the magnitude of retained earnings (RE) as a proxy for a firm¡¯s life cycle stage, I find that the debt-to-equity ratio tends to be low for low-RE firms, high for medium-RE firms, and low for high-RE firms in all seven major countries under study. My evidence suggests that (i) early-stage firms have low leverage because they rely mostly on equity financing as a result of financial constraints, (ii) growth-stage firms have high leverage because they actively use debt to meet funding requirements for growth, and (iii) mature- stage firms have low leverage because they passively accumulate internal equity. Finally, it appears that this inverted-U-shaped relation is related to the free-cash-flow problem for high-RE firms in that, despite relatively slow growth prospects, those firms engage in heavy capital investments using large operating cash flows.
Capital structure,Financial life cycle,Retained earnings
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