Capital structure: A longitudinal study to the effect of growth option value on leverage

Modiglianiand Miller (1958) state that the value of a firm is independent of the financial policy. Further research extensively finds evidence against this claim, and documents several firmspecificcharacteristics influencing the capital structure. One of these characteristics is the amount of growth opportunities, a theoretical construct that is hard to measure and finds a huge amount of proxy variables related to it. This paper bridges the gap between real option theory and capital structure by studying the effect of two estimation procedures of growth option value on leverage. This paper provides evidence on the negative influence of growth option value on leverage, and documents some evidence that the amount of short term debt attenuates this negative effect. The results are based ona sample of 1,058 firms and 5,224 firm-year observations using data from NYSE and NASDAQ firms from 2011-2017.