Theoretical studies imply that debt finance levels are negatively associated to corporate growth potential Growth raises the cost of financial hardship, lowers free cash flow concerns, which corporate.
Theoretical studies imply that debt finance levels are negatively associated to corporate growth potential Growth raises the cost of financial hardship, lowers free cash flow concerns, which corporate executives like to safeguard, and exacerbates debt financing-related agency issues As a result, rising businesses prioritize investments that benefit shareholders; as a result, the trade-off hypothesis predicts that growth decreases debt financing levels For firms in expanding industries with more flexibility in their future investment choices, the cost of the agency partnership is likely to be higher Future growth should be inversely proportional to debt financing levels Higher growth potential creates more incentives to invest inefficiently or accept hazardous ventures that deplete loan holders' wealth The cost of borrowing rises as a result of these opportunities As a result, rather of relying on loans, rising businesses choose to deploy internal resources or equity capital Furthermore, companies that are experiencing rapid development and whose value is derived from intangible growth potential may not want to commit to debt servicing since their revenue may not be accessible when needed Growth prospects, on the other hand, might be compared favorably to leverage, based on the pecking order assumption According to Frank and Goyal (2009), the pecking order hypothesis states that companies with higher investments should accrue more debt over time while maintaining profitability According to the pecking order principle, development possibilities and debt finance are favorably associated Furthermore, the asymmetric knowledge between managers and investors contributes to the pecking order of debt financing choices The asymmetric information hypotheses advanced by Myers and Majluf (1984) claimed that when prices are excessive, managers are more likely to issue additional shares, benefitting existing shareholders This scenario might lead to new shareholders requesting a reduction on the new share pricing As a result, executives avoid issuing additional shares, even if this decision may cause companies to overlook advantageous investments As a result of this conduct, the issue of debt rather than equity may grow, resulting in higher debt financing levels Corporation risk