Essays on finance, taxation and corporate investment

Abstract: Essay 1 investigates the effects on corporate investment of financial deregulation in Sweden during the 1980s. An Euler investment equation, including adjustment and agency costs, is estimated on a large panel of Swedish firms. The analysis suggests that agency costs do affect the investment behavior, and that these costs were reduced for small firms post-deregulation.Essay 2 elaborates on essay 1. It considers firms' simultaneous financial and investment decisions. The econometric analysis shows that the expected marginal tax rate is an important factor for the choice of debt financing. It also shows that debt financing is associated with positive externalities as well as monitoring costs. Since firms are assumed to combine different sources of funds so as to equate their marginal costs, the optimal leverage is shown to be roughly one fifth of the assets. Essay 3 suggest that the IF-system had an extremely uneven impact on structures investments. On average, 13 percent of the firms, which did utilize the system to finance all their investments, lowered their expected user cost of capital by roughly one fifth in the mid-1980s. The response to this reduction is estimated to be an increase of their investment to capital ratios by roughly three fifths. The level of aggregate investment, however, was only slightly affected because of the limited utilisation.Essay 4 analyses the small sample properties of the dynamic panel data GMM estimator. Monte Carlo simulations show that in small samples, the optimally weighted estimator does not have the much discussed high efficiency, and that the empirical size in many cases is indefensibly large. The simulations also show that imposing a kernel on the weighting matrix to some extent rectifies the size. Moreover, the proposed feasibly weighted GMM estimator is shown to achieve a high efficiency, seemingly without deteriorating the empirical size.

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