Financing Corporate Growth

69 Pages Posted: 15 May 2019 Last revised: 23 Sep 2019

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Ali Sanati

American University

Date Written: September 20, 2019


Economists have devoted considerable effort to understand the aggregate impact of debt financing. Despite the lack of similar attention to equity, we show empirically that equity financing plays a leading role in corporate asset growth. An extra dollar of equity issuance is associated with an extra $0.93 of real assets, whereas an extra dollar of debt issuance is associated with an extra $0.14 of real assets. In the data, we find a typical financing-growth sequence in which equity financing comes first, then real assets grow, and finally debt is issued while equity is repurchased. To explain this process, we provide a model in which debt financing is tax preferred but requires collateral. In the model, firms initially issue equity to finance investments. After they obtain assets that can be pledged to lenders, firms substitute debt for equity to benefit from interest tax deductions. We estimate the model and use it to evaluate: 1) the 1996 National Securities Markets Improvement Act, which facilitated equity financing, 2) a government policy to limit corporate debt, and 3) a government policy to limit share buybacks.

Keywords: Corporate growth, Investment, Debt, Equity financing, Government policy

JEL Classification: E22, E44, G31, G32, G38

Suggested Citation

Frank, Murray Z. and Sanati, Ali, Financing Corporate Growth (September 20, 2019). Available at SSRN: or

Murray Z. Frank

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Ali Sanati (Contact Author)

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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