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A Dynamic Model of the Firm: Structural Explanations of Key Empirical Findings

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  • Natalia Lazzati
  • Amilcar A. Menichini

Abstract

We derive a dynamic model of the firm in the spirit of the trade-off theory of capital structure that explains firm behavior in terms of firm characteristics. We show our model is consistent with many important findings about the cross-section of firms, including the negative relations between profitability and leverage, and between dividends and investment-cash flow sensitivities. The model also explains the existence of zero-debt firms and their observed characteristics. These results have been used to challenge the trade-off theory and the assumption of perfect capital markets. We revisit these critiques and provide structural explanations for the regularities we replicate.

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  • Natalia Lazzati & Amilcar A. Menichini, 2015. "A Dynamic Model of the Firm: Structural Explanations of Key Empirical Findings," The Financial Review, Eastern Finance Association, vol. 50(3), pages 341-361, August.
    • Handle: RePEc:bla:finrev:v:50:y:2015:i:3:p:341-361
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    File URL: http://hdl.handle.net/10.1111/fire.12070
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    Cited by:

    1. Menichini, Amilcar A., 2020. "How do firm characteristics affect the corporate income tax revenue?," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 146-162.
    2. Matthew Spiegel, 2023. "For corporate finance to truly advance we need more genuinely testable models," The Financial Review, Eastern Finance Association, vol. 58(4), pages 657-661, November.
    3. Sohail AMJED* & S.M. Amir SHAH**, 2017. "The Impact of Leverage Variances on Growth: A Longitudinal Study of Pakistan’s Corporate Sector," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(2), pages 249-266.

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