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A Reexamination of the Empirical Relationship between Investment and Financing Decisions

Published online by Cambridge University Press:  01 December 2009

Pamela P. Peterson  and
Gary A. Benesh
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Extract

Several studies (see [7], [15], [9], and [16]) have attempted to ascertain the empirical relationships that exist between the financing and investment decisions of firms. The primary impetus for these efforts was provided by Modigliani and Miller (MM) [20], [21] when they demonstrated that under the assumption of perfect capital markets, the optimal investment decisions of a firm are separable from its financing decisions. In the presence of market imperfections, interdependencies between these decisions that violate the basic MM propositions may exist. Therefore, the studies referred to above have essentially focused upon determining whether market imperfections have been of sufficient magnitude to lead to joint determination of investment and financing decisions. Though the original MM propositions were introduced more than two decades ago, the nature of the empirical relationship between investment and financing decisions remains a controversial issue. The fact that this matter is still unresolved is not attributable to a lack of attention, for the original propositions have been examined in the presence of taxes, bankruptcy costs, and agency costs with no clear consensus emerging.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 4 , December 1983 , pp. 439 - 453
Copyright
Copyright © School of Business Administration, University of Washington 1983

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