This paper examines debt-free firms. We and that favorable equity market valuation and borrowing constraints contribute to these firms' extreme debt conservatism. Small debt-free firms with little access to credit markets are seen to raise equity while paying high dividends. Large debt-free firms, generating more cash ows relative to their invest-ment needs, often pay of their debt while paying high dividends. The results suggest that high dividends for small debt-free firms help them establish good reputations in equity markets, while high dividends for large debt-free firms reduce the agency costs of free cash flow.
JEL Classification: G32
Keywords: Capital Structure; Dividend Policy; Zero Debt
