Financial Equity Essay

865 WordsJun 29, 20174 Pages
In their 2009 study, “How Do Firms Finance Their Investments? The Importance of Equity Issuance and Contracting Costs.”, Vladimir A. Gatchev and his colleagues were set on trying to determine how companies respond to changes in profits and investments and how various factors impacted financing decision. The focus was not in testing a theory but getting “a deeper understanding how investment and cash flow shocks affect a firm's financing decision.” (Gatchev, Spindt, & Tarhan, 2009) The study was designed to determine which financing decisions were affected based on the information gathered for consideration. Specifically, the purpose was to determine what the causation or determining factors were when equity was being considered as a…show more content…
The test results were also well document throughout the study. It found that deficits due to investment were financed with long- term and short- term in addition to equity. Market timing cannot totally explain equity issuance as profit deficits were often financed with equity. The study found that companies use equity to fund internal investments such as advertising and Research and Development. Another finding, which is supported by a 2005 study (Fama, 2005), is that small, high-growth, and less-profitable companies tend to use equity for financing than large companies, more profitable companies and low-growth companies. The study also indicated that companies respond to profits deficits with the use of equity, they replenish cash balances and reduce debt in response to positive profits. Finally, the results showed that high asymmetric information companies use more short-term debt than long-term debt to finance fixed asset investments. Further, companies with high potential debt agency costs used more equity and less long-term debt for fixed asset investment financing. The study results
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