Investment Decisions, Financing Decisions, and Firm Value
Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
We estimate that the average value of a dollar invested in the U.S. corporate sector is $1.18. When we delete utilities and current assets, where opportunities for value added seem limited, the estimate jumps to $1.68. We use cross-section regressions to study how value is related to dividends and debt. The regressions can potentially identify tax effects, but they cannot disentangle other factors, including bankruptcy costs, agency costs, and asymmetric information. Simple tax stories say value is negatively related to dividends and positively related to debt, but we find the opposite. We infer that dividends and debt convey information about profitability that obscures any tax effects.
JEL Classification: G30
Date posted: January 27, 1997