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Corporate Financial Dynamics: A Pecking-Order Approach

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Listed:
  • Hovick Shanazarian

Abstract

This paper shows that combining an upper constraint on dividends, a lower constraint on dividends due to shareholder preferences, and an interest rate that increases with the debt ratio leads to a pecking-order financial structure: A typical firm will start to finance a new investment by issuing new shares in combination with debt, then grow by financing its investments with retained earnings and borrowing, and eventually stop growing and distribute all profits. Repurchases of shares will speed up this growth path. Economic depreciation may make the firm want to stop the decline in its capital stock earlier.

Suggested Citation

  • Hovick Shanazarian, 2006. "Corporate Financial Dynamics: A Pecking-Order Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(4), pages 516-534, February.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200602)61:4_516:cfdapa_2.0.tx_2-c
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    References listed on IDEAS

    as
    1. Kanniainen, Vesa & Sodersten, Jan, 1995. "The importance of reporting conventions for the theory of corporate taxation," Journal of Public Economics, Elsevier, vol. 57(3), pages 417-430, July.
    2. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
    3. Alan J. Auerbach & Kevin Hassett & Jan Sodersten, 1995. "Taxation and Corporate Investment: The Impact of the 1991 Swedish Tax Reform," NBER Working Papers 5189, National Bureau of Economic Research, Inc.
    4. Kanniainen, Vesa & Sodersten, Jan, 1994. "Costs of monitoring and corporate taxation," Journal of Public Economics, Elsevier, vol. 55(2), pages 307-321, October.
    5. Sinn, Hans-Werner, 1991. "Share repurchases, the 'new' view, and the cost of capital," Economics Letters, Elsevier, vol. 36(2), pages 187-190, June.
    6. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    pecking order; financial structure; firm growth;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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