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The reduced form as an empirical tool: a cautionary tale from the financial veil

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  • Ben R. Craig
  • Christopher A. Richardson

Abstract

An analysis of the limitations of the reduced-form empirical strategy as a method of testing the Modigliani-Miller model of corporate financial structure, demonstrating that an empirical strategy that is not closely tied to an underlying economic theory of behavior will usually yield estimates that are too imprecise or too unreliable to form a basis for policy.

Suggested Citation

  • Ben R. Craig & Christopher A. Richardson, 1996. "The reduced form as an empirical tool: a cautionary tale from the financial veil," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 16-25.
    • Handle: RePEc:fip:fedcer:y:1996:i:qi:p:16-25
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    References listed on IDEAS

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