Modeling Firms' Choice of Public Issuance

Abstract

In this paper, we evaluate external capital issuance from the perspective of an optimizing agent in a static choice framework. Thus, the issue choice affords a glimpse into the decision-making process of public companies. In the context of this decision, we examine the extent to which we are able to quantify the heterogeneity across firms. To this end, we estimate a hierarchical choice model where the utility derived from each alternative depends only on characteristics (e.g., costs) of that alternative. In the model, firm's responses to these characteristics are functions of that firm's attributes. We find that the higher the cost of an alternative, the lower is the indirect utility derived from that alternative (in a manner that is fully consistent with choice theory). Furthermore, this budget constraint effect is significantly influenced by firm attributes. For instance, more profitable firms are less cost-sensitive in their issuance choices.