The Impact of Equity Financing on Firms' Investment, Dividend and Debt Financing Decisions-Empirical Evidence on Taiwan Public Firms

Abstract

This paper uses financial data of public firms in Taiwan stock market to study the interaction among the investment, dividend and financing decisions of firms. The methodology used by Yang (1989) is used in this paper, that is the two-stage switching simultaneous equation system proposed by Lee, Maddala and Trost (1979). Given that a firm issue new shares or not, the interaction among the three decisions are examined. The results do not provide consistent evidence that the dividend policy of a firm has impacts on its investment policy, whether a firm issues new shares or not. The proposition by Dhrymes and Kurz (1967) that a firm's investment decision competes with its dividend decision for limited source of funds does not gain support either. The increase in long term debt does facilitate the investments. MM's (1958) proposition that a firm's value should be independent of its financing decision is rejected here. Firms are found to adopt dividend smoothing policy.