Financing Corporate Growth

Forthcoming in the Review of Financial Studies

99 Pages Posted: 15 May 2019 Last revised: 12 Dec 2020

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Ali Sanati

American University

Date Written: November 13, 2020


Considerable research focuses on the aggregate impact of debt financing. We show that equity is empirically more important for firm growth than generally understood. 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. Firms issue equity first, then increase real assets, and finally issue debt while repurchasing equity. We explain this sequence using a model in which debt is tax preferred relative to equity but is subject to limited commitment. 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 the effect of several government policies on corporate growth through their impact on the sources of financing.

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 (November 13, 2020). Forthcoming in the Review of Financial Studies, 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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