A Simple Dynamic Model of the Firm: A Structural Explanation of Key Empirical Findings
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Authors
Lazzati, Natalia
Menichini, Amilcar
Subjects
Dynamic Model of the Firm
Gordon Growth Model
Firm Decisions
Trade-Off Theory
Dynamic Programming
Gordon Growth Model
Firm Decisions
Trade-Off Theory
Dynamic Programming
Advisors
Date of Issue
2014-01-15
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Abstract
The empirical literature in corporate nance has documented robust ndings regarding lever-
age, dividend, and investment decisions that appear inconsistent with the predictions of lead-
ing theories. For instance, many papers report negative relations between pro tability and
leverage, and between dividends and investment-cash ow sensitivity. We derive a dynamic
model of the rm that is able to rationalize the main empirical ndings in a uni ed way. In
addition, we successfully explain the existence of all-equity rms and its observed character-
istics. We justify the empirical regularities by acknowledging the endogeneity of the variables
under study as well as their dependence on the primitive characteristics of the rm.
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Article
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Department
Graduate School of Business & Public Policy (GSBPP)
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This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.