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Investment Patterns and Financial Leverage

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  • Michael S. Long
  • Ileen B. Malitz
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    Abstract

    This study Investigates the influence of the type of investment opportunities facing a firm on its choice of capital structure. It is shown that the more discretionary investment opportunities a firm faces,the lower its financial leverage. Inclusion of other possible determinants of capital structure, such as availability of internal funds, tax effects and risk, while significant, do not affect the importance of discretionary investment. The evidence supports (1) the existence of a moral bazzard problem which inversely relates risky debt and discretionary investment choice, and (2) a desire by most firms to use sources of internal funds prior to entering the capital market.

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    File URL: http://www.nber.org/papers/w1145.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1145.

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    Date of creation: Jun 1983
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    Publication status: published as Michael S. Long, Ileen B. Malitz. "Investment Patterns and Financial Leverage," in Benjamin M. Friedman, ed., "Corporate Capital Structures in the United States" University of Chicago Press (1985)
    Handle: RePEc:nbr:nberwo:1145

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    References

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    1. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-52, May.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    Cited by:
    1. Claessens, Stijn & Laeven, Luc, 2002. "Financial development, property rights, and growth," Policy Research Working Paper Series 2924, The World Bank.
    2. Anderson, Michael H. & Prezas, Alexandros P., 1999. "Intangible investment, debt financing and managerial incentives," Journal of Economics and Business, Elsevier, vol. 51(1), pages 3-19, January.
    3. Bruce Burton, 2003. "Evidence on the extent of relationships among investment opportunity set proxies," Applied Economics Letters, Taylor & Francis Journals, vol. 10(7), pages 437-441.
    4. Bruce Burton, 2005. "Concurrent capital expenditure and the stock market reaction to corporate alliance announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 15(10), pages 715-729.
    5. Evaldo Guimarães Barbosa & Cristiana De Castro Moraes, 2003. "Determinants Of The Firm’S Capital Structure - The Case Of The Very Small Enterprises," Finance 0302001, EconWPA, revised 14 Feb 2003.
    6. Martinsson, Gustav, 2009. "Finance and R&D Investments - is there a debt overhang effect on R&D investments?," Working Paper Series in Economics and Institutions of Innovation 174, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    7. B. M. Burton & D. M. Power, 2003. "Evidence on the determinants of equity issue method in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 145-157.

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