Abstract
•Zero leverage firms that do not pay dividends are more financially constrained.•Firm priority to pay dividends affects firm debt levels.•Firms with growth opportunities increase short-term debt to maintain dividends.•Zero leverage firms report higher growth opportunities and greater cash holdings.•Zero leverage firms choose when to exercise a real option to hold debt.
This study investigates zero leverage firms and their choice to pay dividends among New Zealand (NZ) listed firms for the period 2007 – 2021. Overall our findings indicate that after allowing for financial constraints limiting firm debt capacity and firm preference for financial flexibility, firm priority to pay dividends affects firm debt levels. Additional analysis shows that dividend paying firms with growth opportunities will increase short-term debt to maintain dividend payments.