Working Paper: NBER ID: w0955
Authors: Alan J. Auerbach
Abstract: This paper develops a theoretical model of firm behavior consistent with the maximization of shareholder utility, and derives empirically testable implications of different theories of equity finance. Using data on firm earnings and previous investment and financial behavior, we assess whether firms treat new share issues as a more expensive source of finance than retentions, and whether such behavior varies across firms according to the composition of their shareholders. Our results strongly support the hypothesis that firms perceive a higher cost of capital when issuing new shares, and that the cost of capital varies significantly across firms having different estimated tax clienteles, as theory would predict.
Keywords: Firm Behavior; Cost of Capital; Tax Clienteles; Equity Finance
JEL Codes: G30; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perception of new share issues as a more expensive source of finance (G24) | perceived cost of capital (G31) |
| tax clienteles (H26) | perceived cost of capital (G31) |
| type of financing (new shares vs. retained earnings) (G32) | perceived cost of capital (G31) |
| firm financial policies (G32) | perceived cost of capital (G31) |