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Issue Costs in Fisher's Two-Period Model

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  • Howe, Keith M
  • Gronewoller, Paul L

Abstract

This paper analyzes the impact of issue costs on firm investment and dividend policies within the context of the two-period Fisher model. Consistent with its pedagogical tone, the paper illustrates graphically the loss in value stemming from a high dividend payout by a firm subject to issue costs in its external financing. Two components compose the overall loss in value. The "substitution effect" results from a shift in the investment opportunity set, while the "wealth effect" stems from the loss in value owing to issue costs. The paper suggests that the firm, when increasing its dividend payout, must weigh the marginal loss in firm value against the offsetting benefits which may take the form of reduced monitoring costs. Copyright 1990 by MIT Press.

Suggested Citation

  • Howe, Keith M & Gronewoller, Paul L, 1990. "Issue Costs in Fisher's Two-Period Model," The Financial Review, Eastern Finance Association, vol. 25(2), pages 335-343, May.
    • Handle: RePEc:bla:finrev:v:25:y:1990:i:2:p:335-43
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    Cited by:

    1. Donald W. Swanton, 1999. "Teaching Fisher's Theory of Interest in a Simple Auction Setting," The Journal of Economic Education, Taylor & Francis Journals, vol. 30(1), pages 43-51, January.

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