Lang, Ofek, and Stulz (1996) analyzed the relationship between leverag

Lang, Ofek, and Stulz (1996) analyzed the relationship between leverage and growth opportunities. They focus on the market’s assessment of the ability of the firm to generate profitable growth.

Their measure of profitable growth opportunities is Tobin’s q ratio, the ratio of the market value of the firm’s equity to its book value. They summarize their results as follows: “We show that there is a negative relation between leverage and future growth. This negative relation between leverage and growth holds for firms with (i) Tobin’s q ratio, but not for firms with (ii)__ Tobin’s q.
(i) (ii)
a. low high
b. high low

ANSWER

A