Equity Performance of Zero Debt Firms Vis-À-Vis their Leveraged Counterparts

Abstract

The purpose of this paper is to find out if firms that operate with debt free balance sheet are rewarded more by the investors at large. For this we form portfolios of debt free firms and compare their performance with performance of matching portfolios of leveraged firms from the same industry and of similar size. Both absolute and risk-adjusted return measures are used as performance proxies. Our results show that debt-free firms tend to outperform the leveraged counterparts both in terms of absolute and risk adjusted performance measures.

Keywords: zero debt portfolio, leveraged portfolio, absolute performance measure, risk-adjusted performance measure

JEL Classification: G12, G32, G33