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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

    as
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    3. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    4. Smirlock, Michael & Marshall, William, 1983. "An Examination of the Empirical Relationship between the Dividend and Investment Decisions: A Note," Journal of Finance, American Finance Association, vol. 38(5), pages 1659-1667, December.
    5. Michael S. Long & Ileen B. Malitz, 1985. "Investment Patterns and Financial Leverage," NBER Chapters, in: Corporate Capital Structures in the United States, pages 325-352, National Bureau of Economic Research, Inc.
    6. Phoebus J. Dhrymes & Mordecai Kurz, 1967. "Investment, Dividend, and External Finance Behavior of Firms," NBER Chapters, in: Determinants of Investment Behavior, pages 427-485, National Bureau of Economic Research, Inc.
    7. Mougoue, Mbodja & Mukherjee, Tarun K, 1994. "An Investigation into the Causality among Firms' Dividend, Investment, and Financing Decisions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 517-530, Winter.
    8. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
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