The impact of new equity financing on firms' investment, dividend and debt-financing decisions
Yang, Chau-Chen
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https://hdl.handle.net/2142/22126
Description
Title
The impact of new equity financing on firms' investment, dividend and debt-financing decisions
Author(s)
Yang, Chau-Chen
Issue Date
1989
Doctoral Committee Chair(s)
Lee, Cheng F.
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
Investment, dividend and external financing decisions are the major decisions of a firm. External financing includes the flotation of new common shares and/or new debt. Previous studies on the interrelationships among these three decisions precluded new equity financing in their models. Thus, their models were misspecified. This thesis explicitly incorporates new equity financing into the model by using a two-stage switching regression model to analyze the interactions among investment, dividend and debt financing decisions given the impact of new equity financing. Unlike the previous studies using American data, this study does not reject MM's independence theorem on the relation between the investment and dividend decisions of the firm. However, there is strong evidence that capital structure does affect the investment decision of the firm. Furthermore, this thesis provides evidence to reject John and Williams' (1985) dividend signalling theory. A pecking order theory by Donaldson (1961) and Myers (1984) is supported during the recession 1978 to 1982, but rejected during the prosperity period 1983 to 1987. There is also strong evidence of dividend smoothing for firms.
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