Beyond Investment-Cash Flow Sensitivities

Download or read book Beyond Investment-Cash Flow Sensitivities written by Chris Hennessy and published by . This book was released on 2006 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper estimates costs of external finance, applying indirect inference to a dynamic structural model where the corporation endogenously chooses investment, distributions, lever ageand default. The corporation faces double taxation, costly state verification indebt markets, and linear-quadratic costs of external equity. Consistent with direct evidence on under writer fee schedules, behavior is best explained by rising marginal costs of external equity, starting at 3.9%. Contrary to the notion that corporations are debt conservative, leverage is consistent with small (12.2%) bankruptcy costs. Investment-cash flow sensitivities are not a sufficient statistic for financing costs. The cash flow coefficient decreases in external equity costs and increases in bankruptcy costs. When the model is simulated using our parameter estimates, the cash flow coefficient across Fazzari, Hubbard, and Petersen's dividend classes is U-shaped. The difference between cash flow coefficients across dividend classes actually decreases as costs are increased.