In this study, I present evidence of a distinctive inverted-U-shaped relation between leverage
and financial life cycle stage. By using the magnitude of retained earnings (RE) as a proxy for a
firm’s life cycle stage, I find that the debt-to-equity ratio tends to be low for low-RE firms, high
for medium-RE firms, and low for high-RE firms in all seven major countries under study. My evidence suggests that (i) early-stage firms have low leverage because they rely mostly on equity financing as a result of financial constraints, (ii) growth-stage firms have high leverage because they actively use debt to meet funding requirements for growth, and (iii) mature-stage firms have low leverage because they passively accumulate internal equity. Finally, it appears that this inverted-U-shaped relation is related to the free-cash-flow problem for high-RE firms in that, despite relatively slow growth prospects, those firms engage in heavy capital investments using large operating cash flows.