A Dynamic Model of the Firm: Structural Explanations of Key Empirical Findings
Menichini, Amilcar A.
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We derive a dynamic model of the rm in the spirit of the trade-o¤ theory of capital structure that explains rm behavior in terms of rm characteristics. We show our model is consistent with many important ndings about the cross-section of rms, including the negative relations between pro tability and leverage, and between dividends and investment-cash ow sensitivities. The model also explains the existence of zero-debt rms and their observed characteristics. These results have been used to challenge the trade-o¤ theory and the assumption of perfect capital markets. We revisit these critiques and provide structural explanations for the regularities we replicate.