Modeling Firms' Choice of Public Issuance

38 Pages Posted: 25 Mar 2005

See all articles by Chris Lamoureux

Chris Lamoureux

University of Arizona - Department of Finance

Ali Nejadmalayeri

University of Wyoming - College of Business

Date Written: March 15, 2005

Abstract

In this paper, we evaluate external capital issuance from the perspective of an optimizing agent in a static choice framework. Thus, the issue choice affords a glimpse into the decision-making process of public companies. In the context of this decision, we examine the extent to which we are able to quantify the heterogeneity across firms. To this end, we estimate a hierarchical choice model where the utility derived from each alternative depends only on characteristics (e.g., costs) of that alternative. In the model, firm's responses to these characteristics are functions of that firm's attributes. We find that the higher the cost of an alternative, the lower is the indirect utility derived from that alternative (in a manner that is fully consistent with choice theory). Furthermore, this budget constraint effect is significantly influenced by firm attributes. For instance, more profitable firms are less cost-sensitive in their issuance choices.

Keywords: External financing choice

JEL Classification: G32, L20, C11, C35

Suggested Citation

Lamoureux, Chris and Nejadmalayeri, Ali, Modeling Firms' Choice of Public Issuance (March 15, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687116 or http://dx.doi.org/10.2139/ssrn.687116

Chris Lamoureux (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7488 (Phone)

Ali Nejadmalayeri

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

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