Financing Corporate Growth

59 Pages Posted: 15 May 2019

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Ali Sanati

American University

Date Written: April 24, 2019


Considerable effort has been devoted by economists to understand the aggregate impact of debt finance. Despite the lack of similar attention to equity, we show empirically that equity finance plays a leading role in corporate asset growth. An extra dollar of equity issuance is associated with $0.93 more real assets, while an extra dollar of debt is associated with an extra $0.14 of real assets. We find a typical financing-growth sequence in which equity finance comes first, then real assets grow, and after that debt increases while equity is repurchased. To explain this process we provide a model in which debt is tax-preferred, but it 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 use the model to evaluate: 1) the 1996 National Securities Markets Improvement Act that 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 (April 24, 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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