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The marginal source of finance
Uppsala University, Humanistisk-samhällsvetenskapliga vetenskapsområdet, Faculty of Social Sciences, Department of Economics.
2002 (English)Report (Other academic)
Abstract [en]

This paper addresses the ongoingdebate on which view of equity, traditional or new, that best describes firm behavior. According to the traditional view, the marginal source of finance is new equity, whereas under to the new view, marginal financing comes from retained earnings. In the theoretical part, we set up a model where the firm faces a cost of adjusting the dividend level because of an aggravated free cash flow problem. The existence of such a cost - which has been used in arguing the traditional view - does not invalidate the core of the new view, namely that the marginal investment may be financed with retained earnings. The combination of costly changes in dividends and retained earnings as the marginal source of funds actually defines an extended new view of equity. In the empirical part, we test the implication of the new view that dividends and investments are negatively related. The overall conclusion is that the implication of the new view is supported for traded Swedish firms during 1980-98.

Place, publisher, year, edition, pages
Uppsala: Nationalekonomiska institutionen , 2002. , p. 24
Series
Working paper, ISSN 0284-2904 ; 2002:9
Keywords [en]
Economics
Keywords [sv]
Nationalekonomi
National Category
Economics
Identifiers
URN: urn:nbn:se:uu:diva-2229OAI: oai:DiVA.org:uu-2229DiVA, id: diva2:128490
Available from: 2002-05-01 Created: 2002-05-01

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CiteExportLink to record
Permanent link

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Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf