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Financial Pressure and Balance Sheet Adjustment by UK Firms

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Author Info
Andrew Benito () (Banco de España)
Garry Young () (Bank of England)

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Abstract

This paper examines the financial policies and balance sheet adjustment of companies. Using a large panel of quoted UK firms, we estimate models for dividends, new equity issuance and investment, relating them to debt adjustment. The results suggest that while dividends are sticky in the short run, they are an important means of balance sheet adjustment in the long run. Other evidence supports the idea that companies actively target their balance sheet by variation in dividends, new equity issues and investment. There is evidence for financial pressure effects of debt-servicing costs on investment and dividends but not new equity issuance.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/02/Fic/dt0209e.pdf
File Format: application/pdf
File Function: First version, April 2002
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0209.

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Length: 39 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:bde:wpaper:0209

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Related research
Keywords: Financial pressure; dividends; equity issues; debt; investment; company panel data;

Other versions of this item:

Find related papers by JEL classification:
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 197-222, April. [Downloadable!] (restricted)
    Other versions:
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
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  4. Andrew Benito & Garry Young, 2003. "Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 531-555, December. [Downloadable!] (restricted)
    Other versions:
  5. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257. [Downloadable!] (restricted)
  6. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring. [Downloadable!] (restricted)
  7. Arulampalam, W., 1998. "A Note on Estimated Coefficients in Random Effects Probit Models," The Warwick Economics Research Paper Series (TWERPS) 520, University of Warwick, Department of Economics. [Downloadable!]
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  10. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Bond, Stephen R & Chennells, Lucy & Devereux, Michael P, 1996. "Taxes and Company Dividends: A Microeconometric Investigation Exploiting Cross-Section Variation in Taxes," Economic Journal, Royal Economic Society, vol. 106(435), pages 320-33, March. [Downloadable!] (restricted)
  12. Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19. [Downloadable!] (restricted)
  13. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February. [Downloadable!] (restricted)
    Other versions:
  15. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
    Other versions:
  16. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  17. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March. [Downloadable!] (restricted)
    Other versions:
  18. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October. [Downloadable!] (restricted)
  19. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies. [Downloadable!]
  20. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2000-1), pages 61-124. [Downloadable!]
  21. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July. [Downloadable!] (restricted)
  22. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August. [Downloadable!] (restricted)
    Other versions:
  23. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 141-206. [Downloadable!]
    Other versions:
  24. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August. [Downloadable!] (restricted)
    Other versions:
  25. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages F54-F72, February. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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. Albert Jaeger, 2003. "Corporate Balance Sheet Restructuring and Investment in the Euro Area," IMF Working Papers 03/117, International Monetary Fund. [Downloadable!]
  2. Ignacio Hernando & Carmen Martínez-Carrascal, 2003. "The impact of financial variables on firms' real decisions: evidence from Spanish firm-level data," Banco de España Working Papers 0319, Banco de España. [Downloadable!]
  3. Andrew Benito, 2003. "The incidence and persistence of dividend omissions by Spanish firms," Banco de España Working Papers 0303, Banco de España. [Downloadable!]
  4. Andrew Benito & John Whitley, . "Implicit interest rates and corporate balance sheets: an analysis using aggregate and disaggregated UK data," Bank of England working papers 193, Bank of England. [Downloadable!]
  5. Andrew Benito, 2002. "Financial pressure, monetary policy effects and inventory adjustment by UK and Spanish firms," Banco de España Working Papers 0226, Banco de España. [Downloadable!]
  6. Joerg Breitung & Robert Chirinko & Ulf von Kalckreuth, 2003. "A Vectorautoregressive Investment Model (VIM) And Monetary Policy Transmission: Panel Evidence From German Firms," Emory Economics 0307, Department of Economics, Emory University (Atlanta). [Downloadable!]
    Other versions:
  7. Marie Diron & Maria Cruz Manzano & Thomas Westermann, 2005. "Forecasting aggregate investment in the euro area: do indicators of financial conditions help?," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 206-27 Bank for International Settlements. [Downloadable!]
  8. Philip Bunn & Garry Young, . "Corporate capital structure in the United Kingdom: determinants and adjustment," Bank of England working papers 226, Bank of England. [Downloadable!]
  9. Alberto Jaramillo & Hermilson Velásquez & Javier Santiago Ortiz & Natalia Serna, 2003. "Aspectos teóricos y empíricos de la relación empresas bancos," Grupo de estudios en economía y empresa 003922, EAFIT-GRUPO DE ESTUDIOS EN ECONOMIA Y EMPRESA (GEE). [Downloadable!]
  10. Andrew Benito, 2003. "The capital structure decisions of firms: is there a pecking order?," Banco de España Working Papers 0310, Banco de España. [Downloadable!]
  11. Philip Bunn & Kamakshya Trivedi, . "Corporate expenditures and pension contributions: evidence from UK company accounts," Bank of England working papers 276, Bank of England. [Downloadable!]
  12. Peter Gibbard & Ibrahim Stevens, . "Corporate debt and financial balance sheet adjustment: a comparison of the United States, the United Kingdom, France and Germany," Bank of England working papers 317, Bank of England. [Downloadable!]
  13. Andrew Benito & Ignacio Hernando, 2002. "Extricate: Financial Pressure and Firm Behaviour in Spain," Banco de España Working Papers 0227, Banco de España. [Downloadable!]
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This page was last updated on 2009-11-10.


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