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Corporate Financial Dynamics: A Pecking-Order Approach

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  • Hovick Shanazarian
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    Abstract

    This paper shows that combining an upper constraint on dividends, a lower constraint on dividends due to shareholder preferences, and an interest rate that increases with the debt ratio leads to a pecking-order financial structure: A typical firm will start to finance a new investment by issuing new shares in combination with debt, then grow by financing its investments with retained earnings and borrowing, and eventually stop growing and distribute all profits. Repurchases of shares will speed up this growth path. Economic depreciation may make the firm want to stop the decline in its capital stock earlier.

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    Bibliographic Info

    Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

    Volume (Year): 61 (2006)
    Issue (Month): 4 (February)
    Pages: 516-534

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    Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200602)61:4_516:cfdapa_2.0.tx_2-c

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    Related research

    Keywords: pecking order; financial structure; firm growth;

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    References

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    1. Auerbach, A.J. & Hassett, K. & Sodersten, J., 1995. "Taxation and Corporate Investment: The Impact of the 1991 Swedish Tax Reform," Papers 8, Uppsala - Working Paper Series.
    2. Kanniainen, Vesa & Sodersten, Jan, 1995. "The importance of reporting conventions for the theory of corporate taxation," Journal of Public Economics, Elsevier, vol. 57(3), pages 417-430, July.
    3. Sinn, Hans-Werner, 1991. "Share repurchases, the ’new’ view, and the cost of capital," Munich Reprints in Economics 19844, University of Munich, Department of Economics.
    4. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
    5. Kanniainen, Vesa & Sodersten, Jan, 1994. "Costs of monitoring and corporate taxation," Journal of Public Economics, Elsevier, vol. 55(2), pages 307-321, October.
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