An Econometric Model and Empirical Analysis of Interrelationships Between Debt, Dividends, and the Cost of Capital

Autor:	Chenchuramaiah T. Bathala, Ramesh P. Rao
Rok vydání:	2005
Předmět:	Corporate finance Physical capital Capital structure Weighted average cost of capital Cost of capital Marginal cost of capital schedule Financial economics Economic capital Economics General Earth and Planetary Sciences Capital intensity Monetary economics General Environmental Science
Zdroj:	Metamorphosis: A Journal of Management Research. 4:9-25
ISSN:	2348-9324 0972-6225
DOI:	10.1177/0972622520050102
Popis:	In this paper we argue that dividends, debt leverage, and the firm's cost of capital are endogenously related. In order to correctly account for the interdependence between those variables, we develop an econometric model in a system of simultaneous equations. Specifically, we estimate three multiple regression equations with three endogenous variables as the dependent variables using 2SLS and 3SLS methods. Our findings from the 3SLS method show that the three endogenous variables are negatively related to each other. The evidence suggests that use of debt leverage and dividend payout can lower the firm's cost of capital. High beta stocks tend to have higher cost of capital and firms with higher cash flows have a lower cost of capital. The larger the firm size, the lower is the cost of capital. Firms in the financial sector, technology, and utilities have higher costs of capital than those in the excluded set. The findings provide important implications for financial and investment policies of firms.
Databáze:	OpenAIRE
Externí odkaz:	https://explore.openaire.eu/search/publication?articleId=doi_________::e854cb734a72d6d42bb09ca6995e44aa https://doi.org/10.1177/0972622520050102 Zobrazit plný text záznamu