Is the zero-leverage policy a persistent phenomenon? Evidence from Portuguese SMEs

This paper seeks to analyse the persistence of zero leverage policy in a panel data of Portuguese small and medium-sized enterprises for the period 2011-2017. Using transition probability matrices, we show the existence of state dependence on the zero leverage behaviour. Using dynamic probit models with random effects, to control the initial conditions problem and unobserved heterogeneity of firms, we find indications of "true" state dependence on the zero leverage phenomenon. The firm-specific characteristics, cash holdings, cash flows, and owners´ loans positively impact the probability of SMEs to adopt the zero leverage policy. The past zero leverage state is the most influential factor in explaining the current state of zero leverage policy.