Financial Frictions and Capital Structure Choice: A Structural Dynamic Estimation

Persistent Link:
http://hdl.handle.net/10150/145397
Title:
Financial Frictions and Capital Structure Choice: A Structural Dynamic Estimation
Author:
MENICHINI, AMILCAR ARMANDO
Issue Date:
2011
Publisher:
The University of Arizona.
Rights:
Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
Abstract:
This thesis studies different aspects of firm decisions by using a dynamic model. I estimate a dynamic model of the firm based on the trade-off theory of capital structure that endogenizes investment, leverage, and payout decisions. For the estimation of the model I use Efficient Method of Moments (EMM), which allows me to recover the structural parameters that best replicate the characteristics of the data. I start analyzing the question of whether target leverage varies over time. While this is a central issue in finance, there is no consensus in the literature on this point. I propose an explanation that reconciles some of the seemingly contradictory empirical evidence. The dynamic model generates a target leverage that changes over time and consistently reproduces the results of Lemmon, Roberts, and Zender (2008). These findings suggest that the time-varying target leverage assumption of the big bulk of the previous literature is not incompatible with the evidence presented by Lemmon, Roberts, and Zender (2008). Then I study how corporate income tax payments vary with the corporate income tax rate. The dynamic model produces a bell-shaped relationship between tax revenue and the tax rate that is consistent with the notion of the Laffer curve. The dynamic model generates the maximum tax revenue for a tax rate between 36% and 41%. Finally, I investigate the impact of financial constraints on investment decisions by firms. Model results show that investment-cash flow sensitivity is higher for less financially constrained firms. This result is consistent with Kaplan and Zingales (1997). The dynamic model also rationalizes why large and mature firms have a positive and significant investment-cash flow sensitivity.
Type:
Electronic Dissertation; text
Keywords:
Dynamic structural model; Efficient method of moments; Speed of mean-reversion; Target leverage; Trade-off theory
Degree Name:
Ph.D.
Degree Level:
doctoral
Degree Program:
Graduate College; Business Administration
Degree Grantor:
University of Arizona
Advisor:
Lamoureux, Christopher G.

Full metadata record

DC FieldValue Language
dc.language.isoenen_US
dc.titleFinancial Frictions and Capital Structure Choice: A Structural Dynamic Estimationen_US
dc.creatorMENICHINI, AMILCAR ARMANDOen_US
dc.contributor.authorMENICHINI, AMILCAR ARMANDOen_US
dc.date.issued2011-
dc.publisherThe University of Arizona.en_US
dc.rightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.en_US
dc.description.abstractThis thesis studies different aspects of firm decisions by using a dynamic model. I estimate a dynamic model of the firm based on the trade-off theory of capital structure that endogenizes investment, leverage, and payout decisions. For the estimation of the model I use Efficient Method of Moments (EMM), which allows me to recover the structural parameters that best replicate the characteristics of the data. I start analyzing the question of whether target leverage varies over time. While this is a central issue in finance, there is no consensus in the literature on this point. I propose an explanation that reconciles some of the seemingly contradictory empirical evidence. The dynamic model generates a target leverage that changes over time and consistently reproduces the results of Lemmon, Roberts, and Zender (2008). These findings suggest that the time-varying target leverage assumption of the big bulk of the previous literature is not incompatible with the evidence presented by Lemmon, Roberts, and Zender (2008). Then I study how corporate income tax payments vary with the corporate income tax rate. The dynamic model produces a bell-shaped relationship between tax revenue and the tax rate that is consistent with the notion of the Laffer curve. The dynamic model generates the maximum tax revenue for a tax rate between 36% and 41%. Finally, I investigate the impact of financial constraints on investment decisions by firms. Model results show that investment-cash flow sensitivity is higher for less financially constrained firms. This result is consistent with Kaplan and Zingales (1997). The dynamic model also rationalizes why large and mature firms have a positive and significant investment-cash flow sensitivity.en_US
dc.typeElectronic Dissertationen_US
dc.typetexten_US
dc.subjectDynamic structural modelen_US
dc.subjectEfficient method of momentsen_US
dc.subjectSpeed of mean-reversionen_US
dc.subjectTarget leverageen_US
dc.subjectTrade-off theoryen_US
thesis.degree.namePh.D.en_US
thesis.degree.leveldoctoralen_US
thesis.degree.disciplineGraduate Collegeen_US
thesis.degree.disciplineBusiness Administrationen_US
thesis.degree.grantorUniversity of Arizonaen_US
dc.contributor.advisorLamoureux, Christopher G.en_US
dc.contributor.committeememberGowrisankaran, Gautamen_US
dc.contributor.committeememberJiang, Georgeen_US
dc.contributor.committeememberKlasa, Sandyen_US
dc.identifier.proquest11458-
dc.identifier.oclc752261327-
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