Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2000:8: The Dynamics of External Financing

Joakim Jansson ()
Additional contact information
Joakim Jansson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: A dynamic process underlying firms' discrete financial choices has previously been found, but without controlling for unobserved heterogeneity, this dependence can either be of a "true" nature or an effect of firm-specific characteristics that we cannot observe. This study extends previous research focusing on firms' discrete external financing decision by adapting a model by Honoré and Kyriazidou (2000), which accommodates both fixed effects and a lagged dependent variable, which makes it possible to establish the nature of the dependence. We find that there is a smoothing of financing, even after controlling for unobserved heterogeneity, and also that unobserved heterogeneity plays a significant explanatory role.

Keywords: Corporate finance; Discrete choice; State dependence

JEL-codes: C25; C32

35 pages, August 7, 2000

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