Zero -debt firms: An examination of stockholder returns

The purpose of this study is to examine the returns to stockholders of zero-debt firms. Finns are segregated into four zero-debt portfolio groupings. The first group consists of firms reporting zero long-term debt in any year. The second group contains those firms that maintain a zero-debt capital structure for two consecutive years. The third group consists of firms that change from zero-debt in one year to a positive level of long-term debt in the following year. Finally, those firms changing from a levered to an unlevered structure will makeup the fourth portfolio grouping.;Portfolios are constructed and rebalanced every year using end of year stock prices for the sample firms. Those portfolio returns will be compared to the S&P 500 Index to determine the benefits to stockholders following a zero debt trading rule. A risk adjusted model based on Christie's (1990) zero-dividend puzzle study is employed to extend the analysis.;In addition, an examination of the relationship between economic sectors and zero-debt returns is performed. Further, this study examines the relationship between economic variables and zero-debt returns.;The analyses reveals that zero-debt firms outperformed the S&P 500 over the study period. However, when a size-based risk adjustment is made, normal returns are found. The relationship between zero-debt returns and economic sectors changes between 1990 and 1991. Prior to 1991, returns are related to specific sectors, and after 1990 the relationship dissolves. Finally, the returns to zero-debt stockholders are not significantly related to economic variables other than the S&P 500 Index.