An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions

An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or Logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. The main purpose of this study is to use a two stage Bivariate Probit–Tobit model to examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions

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Publisher
Springer Journals
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-010-0208-x
Publisher site
See Article on Publisher Site

Abstract

Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or Logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. The main purpose of this study is to use a two stage Bivariate Probit–Tobit model to examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 14, 2010

References

  • Testing the pecking order theory of capital structure
    Frank, M; Goyal, V
  • An integrated model of debt issuance, refunding, and maturity
    Gupta, MC; Lee, AC
  • Determinants of target capital structure: the case of dual debt and equity issues
    Hovakimian, A; Hovakimian, G; Tehranian, T
  • Capital structure choice: macroeconomic conditions and financial constraints
    Korajczyk, R; Levy, A

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