I suggest to have a look at:

1) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1814182

2) http://www2.warwick.ac.uk/fac/soc/wbs/subjects/finance/fof2012/programme/rappschmidurban_the_value_of_financial_flexibility_and_payout_policy_1.pdf

Danke dir Marc. Hat mir super geholfen.

From the perspective of trade-off theory, growth firms should use less debt because growth opportunity is intangible assets which cannot be used as collateral in the event of bankruptcy. From the perspective of pecking order theory, firms with high growth opportunity have lower debt ratio to avoid the problem of underinvestment. See Myers (1984) article for more explanation: The capital structure puzzle, Journal of Finance, 39(3) for better understanding.

It is also possible that growth firms use lower debt ratio to preserve debt capacity in the future. That is they use less debt to be able to raise additional funds in the future.

Ratio is a fucntion of the asset mix. Companies can't finance venture/growth with debt. Hence lower ratio.

If my answer is not right, please correct me. I think that the high growth companies associate with future potential investments. High debt ratio increases financial distress which reduce raising funds ability of such companies. Therefore, there is negative relationship between debt ratio and growth rate of companies.

HI,

You may have a look to this paper:

Leverage changes and growth options in mergers and acquisitions

Journal of Empirical Finance, June 2016, Pages 37-58

Elettra Agliardi, Amir Amel-Zadeh, Nicos Koussis

Best regards

Dear Marlon,

High growth companies may be new-coming start-ups facing a credibility gap on part of finance providers. They cannot achieve a high gearing due to difficulties to obtain finance as compared to long-established companies. Also, mature companies may be in need of funds to finance R&D and to develop new products and services, whereas start-ups may grow because they already possess a new and promising product securing future growth.

Paul

Dear Marlon Gray

From Pecking Order Theory perspective, it could positive or negative relationship

(+) The higher growth opportunities of the company lead to the higher asymmetric information. The company would prefer to use debt to suppress the asymmetric information that may be happened (Song, 2005).

(-) The companies which have higher growth rate will maximize the utilization of their internal resources owned (Hardiningsih, 2012)

From Agency Theory perspective, it would be negative relationship

(-) The firms with high growth opportunities were more likely to have higher agency costs due to higher debt prices. When managers plan to invest in riskier projects, creditors will take chance to increase the amount of interest and these will lead to shift of corporate control to creditors.  Consequently, most of the cash flow generated can’t be utilized for good investments as cash flow gets committed to the interest payment. The firms with good growth opportunities would maintain a lower leverage in order to minimize the constraints imposed by the creditors and maximize the potential gains. (Jensen and Meckling, 1976).

From signaling theory perspective, it would be positive relationship

(+) Companies could informing the growth prospects in the future by using debt. Because debt can be a positive signal for foreign investors, so that foreign investors can trust and believe that the outlook for companies in the future will be good. (Myers and Majluf, 1977)

(+) Companies which favorable prospects will avoid to issue shares and if necessary by other means, including the use of debt which may exceeds the target capital structure. Companies which less favorably prospects tend to sell their shares. Announcement of issuance of shares by a company usually as a signal that the company's prospects is bleak (Brigham and Houston, 2004)

References :

Song (2005), Capital Structure Determinants An Empirical Study of Swedish Companies https://static.sys.kth.se/itm/wp/cesis/cesiswp25.pdf

Hardiningsih, P and Oktaviani RM, (2012), Determinan Kebijakan Hutang (Dalam Agency Theory Dan Pecking Order Theory), Dinamika Akuntansi, Keuangan Dan Perbankan, Vol. 1,  No. 1,  Hal:  11

Jensen, M. C dan W. H. Meckling. (1976) Theory of the Firm: Managerial Behavior, Agency cost and Ownership Structure. Journal of Financial Economics. Vol. 3(4): 305-360.

Myers, S (1977), ‘Determinants of corporate borrowing’, Journal of Financial Economics, vol. 5, no. 3, pp. 799–819.

Myers S.C., and Majluf N. (1984). Corporate Financing and Investment Decisions when Firms have Information that Investors do not have, The Journal of Financial Economics, Vol. 13, pp. 187-221.

Brigham, E.F. and J.F. Houston. (2004). Fundamentals of Financial Management. 4th edition. Thomas South Western Publisher.

Best Regards,

DEBT RATIO = Total debts / Total Assets

DEBT RATIO = Total liabilities / Total Assets

LARGE ASSETS tbat has better return of asset, i.e. effective use of assets to produce higher income. With better ROA or high income from assets tbere is no need to borrow money. This is called self sufficient, no need for borrowing to sustain operations. When there is no need to borrow, there is no or little liabilities or debts, thus, debt ratio is low.

Following