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In this paper, the authors examine the motivations for firms to remain debt free. Using a sample of firms that have no debt for three consecutive years, they find little support for the managerial entrenchment, flexibility, or the tax hypotheses. These firms do not have weak governance mechanisms, they payout more cash, and have a higher marginal tax rate. Debt initiation decisions of these firms also offer no support for these explanations. These firms do not face takeover threats and activist blockholders emerge in fewer than 5% of the firms. They find that these results are generalizable to leverage increasing decisions of already levered firms.
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