How Costly Is External Financing? Evidence from a Structural Estimation

We apply simulated method of moments to a dynamic model to infer the magnitude of financing costs. The model features endogenous investment, distributions, leverage, and default. The corporation faces taxation, costly bankruptcy, and linear-quadratic equity flotation costs. For large (small) firms,...

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Bibliographic Details
Published in:The Journal of finance (New York) 2007-08, Vol.62 (4), p.1705-1745
Main Authors: HENNESSY, CHRISTOPHER A., WHITED, TONI M.
Format: Article
Language:English
Subjects:
Bankruptcy
Cash
Corporate finance
Corporate taxation
Cost analysis
Cost estimates
Cost estimation models
Cost of equity
Costs
Debt
Equity
External financing
Financial engineering
Financial investments
Financial management
Financial models
Financing
Modeling
Negative externalities
Simulation
Studies
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Summary:We apply simulated method of moments to a dynamic model to infer the magnitude of financing costs. The model features endogenous investment, distributions, leverage, and default. The corporation faces taxation, costly bankruptcy, and linear-quadratic equity flotation costs. For large (small) firms, estimated marginal equity flotation costs start at 5.0% (10.7%) and bankruptcy costs equal to 8.4% (15.1%) of capital. Estimated financing frictions are higher for low-dividend firms and those identified as constrained by the Cleary and Whited-Wu indexes. In simulated data, many common proxies for financing constraints actually decrease when we increase financing cost parameters.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2007.01255.x