An Empirical Investigation on the Dynamics of Qualitative Decisions of Firms
by
Stelios Corres, Vassilis A. Hajivassiliou, and Yannis M. Ioannides
January 2002
Abstract
This paper focuses on qualitative aspects of financing, investment and output decisions of firms. Such dimensions can be modeled econometrically by means of dynamic limited dependent variables models. We develop a partial equilibrium dynamic stochastic programming problem of investment, dividend and financing decisions for a typical firm.
We apply techniques involving limited dependent variable models to study the discrete decisions of whether or not firms pay dividends, use borrowing or issue equity to finance investment. We use panel data from COMPUSTAT for publicly traded U.S. manufacturing firms. We study the pattern of transitions over time across various regimes that represent alternative modes of finance while controlling for individual heterogeneity with a general stochastic structure for unobservables. Our dynamic limited dependent variable models show considerable success in explaining the dynamics of such decisions, with individual characteristics of firms, which include firm fundamentals and lagged values of past decisions, exhibiting a strong explanatory impact. The dynamics implied by the estimated models reveal high persistence in firms' qualitative decisions. Unobserved firm heterogeneity, which is modelled by means of random effects, plays a very significant explanatory role.
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