Kauppakorkeakoulun julkaisuportaali
Aalto-yliopiston kauppakorkeakoulun gradujen tiedot nyt Aaltodocissa: Aaltodoc-julkaisuarkisto
Kauppakorkeakoulu | Laskentatoimen ja rahoituksen laitos | Rahoitus | 2010
Tutkielman numero: 12411
Firm leverage and its effects on future growth
Tekijä: Hurme, Susanna
Otsikko: Firm leverage and its effects on future growth
Vuosi: 2010  Kieli: eng
Laitos: Laskentatoimen ja rahoituksen laitos
Aine: Rahoitus
Asiasanat: rahoitus; financing; velat; debt; yritykset; companies; kasvu; growth; syklit; cycles
Sivumäärä: 71
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Avainsanat: leverage; debt; firm growth; economic cycles; Tobin's q; growth oppotunities

The purpose of this thesis is to give contribution to the iscussion of firm leverage and its effect on firm growth measured in employment and capital expenditures growth, and net investment. Moreover, the effect of anticipated growth opportunities (Tobin’s q) on this relation is studied. The study aims to reveal and describe the possible differences in the leverage-growth relation not only based on growth opportunities, but also based on economic cycles. This study follows closely the settings of an earlier study by Lang et al.(1996).

DATA Data covers the U.S. companies from base years 1990-2008 with one billion or more dollar sales measured in 1990’s dollars. All data was obtained from Thomson ONE Banker. To avoid regulation effects the sample was restricted to industrial companies under SIC codes 2000-3999. Final sample consist of 4,816 firm-years. Growth is measured by three different ways; net investment, growth rate of real capital expenditures, and growth rate of employment. The relation between growth and book leverage is studied with linear regression. In addition to book leverage, sales growth, capital expenditures, cash flow and Tobin’s q are controlled as independent variables. Besides, the effect of anticipated growth opportunities to this leverage-growth relation is studied. Regressions are repeated for subperiods of normal intermediate years (1991-1996, 2002-2005) and abnormal years (1990, 1997-2001, 2006-2008) as well as periods of economic boom and recession.

RESULTS At the level of whole time period, there is a statistically significant relation between leverage and firm future growth within all growth measures. After letting the anticipated growth opportunities affect regression coefficient, this relation is seen with low-q firms between leverage and employment growth and capital expenditures growth. High-q firms show the same negative relation for investment and capital expenditures growth.

These results do not hold at subperiod level. Results indicate that firms with low anticipated growth opportunities (low-q) experience negative relation between leverage and growth over different economic cycles, while high-q firms suffer from the negative effects of debt only during the intermediate years after recession. Within high-q firms only net investment are limited by debt during economic bubbles. Similarly, exception within low-q firms is that they do not show negative relation between leverage and one-year capital expenditures during intermediate years.

Thus, it appears that high-q firms are in general able to utilize their growth opportunities over the abnormal years regardless their capital structure, while the low-q firms are relatively efficiently limited from overinvesting by debt over different economic cylces.

KEYWORDS Leverage, debt, firm growth, economic cycles, Tobin’s q, growth opportunities
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