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A Financial Theory of Firm Growth

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Author Info
Holger Strulik ()
Abstract

The paper analyses dynamic investment behaviour and labour demand of the financially restricted firm. It shows that firm development is characterised by a negative correlation between leverage and the stocks of capital and labour but a positive correlation between leverage and investment and labour hiring. The paper explains why firm growth is decreasing with firm size and age, and why a corporate tax cut leads to a lower debt equity ratio, higher employment and an overshooting dividend ratio. A calibrated version of the model also calculates the welfare implications for shareholders.

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Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 19910.

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Date of creation: Oct 1999
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Handle: RePEc:ham:qmwops:19910

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  1. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley. [Downloadable!]
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  2. Auerbach, Alan J., 1984. "Taxes, firm financial policy and the cost of capital: An empirical analysis," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 27-57. [Downloadable!] (restricted)
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  3. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September. [Downloadable!] (restricted)
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  4. 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)
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  5. Steigum, Erling, Jr, 1983. "A Financial Theory of Investment Behavior," Econometrica, Econometric Society, vol. 51(3), pages 637-45, May. [Downloadable!] (restricted)
  6. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
  7. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Blackwell Publishing, vol. 35(4), pages 567-81, June. [Downloadable!] (restricted)
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  1. Winston Moore & Roland Craigwell, 2004. "Financing Constraints and Corporate Growth," Computing in Economics and Finance 2004 25, Society for Computational Economics. [Downloadable!]
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