The Marginal Source of Finance
This paper addresses the ongoingdebate on which view of equity, traditional or new, that best describes firm behavior. According to the traditional view, the marginal source of finance is new equity, whereas under to the new view, marginal financing comes from retained earnings. In the theoretical part, we set up a model where the firm faces a cost of adjusting the dividend level because of an aggravated free cash flow problem. The existence of such a cost - which has been used in arguing the traditional view - does not invalidate the core of the new view, namely that the marginal investment may be financed with retained earnings. The combination of costly changes in dividends and retained earnings as the marginal source of funds actually defines an extended new view of equity. In the empirical part, we test the implication of the new view that dividends and investments are negatively related. The overall conclusion is that the implication of the new view is supported for traded Swedish firms during 1980-98.
|Date of creation:||02 May 2002|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden|
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan J. Auerbach & Kevin A. Hassett, 2000.
"On the Marginal Source of Investment Funds,"
NBER Working Papers
7821, National Bureau of Economic Research, Inc.
- James M. Poterba & Lawrence H. Summers, 1984.
"The Economic Effects of Dividend Taxation,"
343, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bradford, David F., 1981.
"The incidence and allocation effects of a tax on corporate distributions,"
Journal of Public Economics,
Elsevier, vol. 15(1), pages 1-22, February.
- David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
- Alan J. Auerbach, 1980.
"Share Valuation and Corporate Equity Policy,"
NBER Working Papers
0255, National Bureau of Economic Research, Inc.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
When requesting a correction, please mention this item's handle: RePEc:hhs:uunewp:2002_009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Katarina Grönvall)
If references are entirely missing, you can add them using this form.