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The reduced form as an empirical tool: a cautionary tale from the financial veil

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Author Info
Ben Craig
Christopher A. Richardson
Abstract

An analysis of the limitations of the reduced-form empirical strategy as a method of testing the Modigliani-Miller model of corporate financial structure, demonstrating that an empirical strategy that is not closely tied to an underlying economic theory of behavior will usually yield estimates that are too imprecise or too unreliable to form a basis for policy.

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File URL: http://clevelandfed.org/Research/Review/1996/96-q1-craig.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

Volume (Year): (1996)
Issue (Month): Q I ()
Pages: 16-25
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:fip:fedcer:y:1996:i:qi:p:16-25

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Related research
Keywords: Corporations - Finance ; Investments;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994-2), pages 1-74. [Downloadable!]
  2. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  3. Phoebus J. Dhrymes & Mordecai Kurz, 1967. "Investment, Dividend, and External Finance Behavior of Firms," NBER Chapters, in: Determinants of Investment Behavior, pages 427-486 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March. [Downloadable!] (restricted)
  6. Smirlock, Michael & Marshall, William, 1983. " An Examination of the Empirical Relationship between the Dividend and Investment Decisions: A Note," Journal of Finance, American Finance Association, vol. 38(5), pages 1659-67, December. [Downloadable!] (restricted)
  7. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  8. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March. [Downloadable!] (restricted)
  9. McCabe, George M., 1979. "The Empirical Relationship Between Investment and Financing: A New Look," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(01), pages 119-135, March. [Downloadable!]
  10. McDonald, John G. & Jacquillat, Bertrand & Nussenbaum, Maurice, 1975. "Dividend, Investment and Financing Decisions: Empirical Evidence on French Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(05), pages 741-755, December. [Downloadable!]
  11. Mougoue, Mbodja & Mukherjee, Tarun K, 1994. "An Investigation into the Causality among Firms' Dividend, Investment, and Financing Decisions," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 17(4), pages 517-30, Winter.
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