An Application of the Two-Stage Bivariate Probit-Tobit Model to Corporate Financing Decisions

32 Pages Posted: 27 Sep 2009

See all articles by Carmen Cotei

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Date Written: September 26, 2007

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. In this study, we examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues using a two stage Bivariate Probit-Tobit model. 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.

Keywords: Capital structure, Two-Stage Bivariate Probit-Tobit model

JEL Classification: G00 , G32, C01

Suggested Citation

Cotei, Carmen and Farhat, Joseph, An Application of the Two-Stage Bivariate Probit-Tobit Model to Corporate Financing Decisions (September 26, 2007). Available at SSRN: https://ssrn.com/abstract=1478882 or http://dx.doi.org/10.2139/ssrn.1478882

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

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