Hostname: page-component-848d4c4894-2pzkn Total loading time: 0 Render date: 2024-06-08T18:30:47.281Z Has data issue: false hasContentIssue false
  • English
  • Français

A Reexamination of the Empirical Relationship between Investment and Financing Decisions

Published online by Cambridge University Press:  01 December 2009

Pamela P. Peterson  and
Gary A. Benesh
Get access Rights & Permissions [Opens in a new window]

Extract

Several studies (see [7], [15], [9], and [16]) have attempted to ascertain the empirical relationships that exist between the financing and investment decisions of firms. The primary impetus for these efforts was provided by Modigliani and Miller (MM) [20], [21] when they demonstrated that under the assumption of perfect capital markets, the optimal investment decisions of a firm are separable from its financing decisions. In the presence of market imperfections, interdependencies between these decisions that violate the basic MM propositions may exist. Therefore, the studies referred to above have essentially focused upon determining whether market imperfections have been of sufficient magnitude to lead to joint determination of investment and financing decisions. Though the original MM propositions were introduced more than two decades ago, the nature of the empirical relationship between investment and financing decisions remains a controversial issue. The fact that this matter is still unresolved is not attributable to a lack of attention, for the original propositions have been examined in the presence of taxes, bankruptcy costs, and agency costs with no clear consensus emerging.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 4 , December 1983 , pp. 439 - 453
Copyright
Copyright © School of Business Administration, University of Washington 1983

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Ang, James S.; Chua, Jess H.; and McConnell, John J.. “The Administrative Costs of Corporate Bankruptcy: A Note.” Journal of Finance. Vol. 37 (March 1982), pp. 219–226.CrossRefGoogle Scholar
[2]Beedles, William I. “A Micro-Econometric Investigation of Multi-Objective Firms.” Journal of Finance, Vol. 32 (September 1977). pp. 1217–1234.Google Scholar
[3]Barnea, Amir; Haugen, Robert A.; and Senbet, Lemma W.. “An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems.” Journal of Finance, Vol. 36 (July 1981), pp. 569–582.CrossRefGoogle Scholar
[4]Buse, A. “Goodness-of-Fit in the Seemingly Unrelated Regressions Model” Journal of Econometrics. Vol. 10 (1979), pp. 109–113.CrossRefGoogle Scholar
[5]Dhrymcs, Phoebus J. “Alternative Asymptotic Tests of Significance and Related Aspects of 2SLS and 3SLS Estimated Parameters.” Review of Economic Studies, Vol. 36 (1969), pp. 213–226.CrossRefGoogle Scholar
[6]Dhrymcs, Phoebus J.Econometrics, Statistical Foundations and Applications, New York: Harper and Row (1970).Google Scholar
[7]DhrymesPhoebus, J. Phoebus, J., and Kurz, Mordecai. “Investment, Dividend and External Finance Behavior of Firms.” In Determinants of Investment Behavior, NBER, Ferber, Robert, ed. New York: National Bureau of Economic Research (1967).Google Scholar
[8]Fama, Eugene F. “The Empirical Relationship between the Dividend and Investment Decisions of Firms” American Economic Review, Vol. 64 (June 1974), pp. 304–318.Google Scholar
[9]Fama, Eugene F., and Babiak, Harvey. “Dividend Policy: An Empirical Analysis.” Journal of the American Statistical Association, Vol. 63 (December 1968), pp. 1132–1161.CrossRefGoogle Scholar
[10]Higgins, Robert C. “The Corporate Dividend-Saving Decision.” Journal of Financial and Quantitative Analysis, Vol. 7 (March 1972), pp. 1527–1541.CrossRefGoogle Scholar
[11]Hilliard, Jimmy E., and Lloyd, William P.. “Coefficient of Determination in a Simultaneous Equation Mode: A Pedagogic Note.” Journal of Business Research, Vol. 8 (1980), pp. 1–6.CrossRefGoogle Scholar
[12]Kim, E. Han. “Miller's Equilibrium, Shareholder Leverage Clienteles and Optimal Capital Structure.” Journal of Finance. Vol. 37 (May 1982), pp. 301–318.CrossRefGoogle Scholar
[13]Latané, Henry A. “Comments on Dhrymes-Kurz and Anderson.” In Determinants of Investment Behavior, NBER, Ferber, Robert, ed. New York: National Bureau of Economic Research (1967), pp. 468–485.Google Scholar
[14]Lintner, John. “Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes.” American Economic Review, Vol. 46 (May 1956), pp. 97–118.Google Scholar
[15]McCabe, George M. “The Empirical Relationship between Investment and Financing: A New Look.” Journal of Financial and Quantitative Analysis, Vol. 14 (March 1979), pp. 119–135.CrossRefGoogle Scholar
[16]McDonald, John G.; Jacquillat, Bertrand; and Nussenbaum, Maurice. “Dividend, Investment and Financing Decisions: Empirical Evidence on French Firms.” Journal of Financial and Quantitative Analysis, Vol. 10 (December 1975), pp. 741–755.CrossRefGoogle Scholar
[17]McElroy, Marjorie B. “Goodness-of-Fit for Seemingly Unrelated Regressions.” Journal of Econometrics, Vol. 6 (1977), pp. 381–387.CrossRefGoogle Scholar
[18]Miller, Merton. “Debt and Taxes.” Journal of Finance, Vol. 32 (May 1977), pp. 261–275.Google Scholar
[19]Modigliani, Franco. “Debt, Dividend Policy, Taxes, Inflation, and Market Valuation.” Journal of Finance, Vol. 37 (May 1982), pp. 255–274.CrossRefGoogle Scholar
[20]Modigliani, Franco, and Miller, Merton. “Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, Vol. 48 (June 1958), pp. 261–297.Google Scholar
[21]Modigliani, Franco, and Miller, Merton. “Corporate Income Taxes and the Cost of Capital: A Correction.” American Economic Review, Vol. 53 (June 1963), pp. 433–443.Google Scholar
[22]Morgan, Alison, and Vandaele, Walter. “On Testing Hypotheses in Simultaneous Equation Models.” Journal of Econometrics, Vol. 2 (1974), pp. 55–65.CrossRefGoogle Scholar
[23]Resek, R. W. “Comment on Dhrymes-Kurz and Anderson.” In Determinants of Investment Behavior, NBER, Ferber, Robert, ed. New York: National Bureau of Economic Research (1967).Google Scholar
[24]Saltzman, S. “An Econometric Model of a Firm.” Review of Economics and Statistics, Vol. 49 (August 1967), pp. 332–342.CrossRefGoogle Scholar
[25]Taggart, Robert A. “Taxes and Corporate Capital Structure in an Incomplete Market.” Journal of Finance, Vol. 35 (June 1980), pp. 645–660.CrossRefGoogle Scholar
[26]Thiel, Henri. Principles of Econometrics New York: John Wiley and Sons, Inc. (1971).Google Scholar
[27]Warner, J. B. “Bankruptcy Costs: Some Evidence.” Journal of Finance, Vol. 32 (May 1977), pp. 337–347.CrossRefGoogle Scholar
[28]Zellner, Arnold. “An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias.” Journal of the American Statistical Association, Vol. 57 (June 1962), pp. 348–368.CrossRefGoogle Scholar
[29]Zellner, Arnold. “Estimators for Seemingly Unrelated Regression Equations: Some Exact Finite Sample Results.” Journal of the American Statistical Association, Vol. 58 (December 1963), pp. 977–992.CrossRefGoogle Scholar