Trade-off theory and zero leverage

This paper documents that the timing of debt issuance is important to produce zero leverage in the firms' cross-section based on the static trade-off theory. Therefore, even basics of the trade-off theory do not contradict with zero leverage, also known as the zero-leverage mystery. Earlier static trade-off models fail to produce zero leverage because they ignore the optimal timing to have debt. We introduce this new mechanism in the static trade-off model, which appears as strong as considering the default costs. We show the application of this mechanism to generate zero leverage in two varieties of the static trade-off models.