Involuntary corporate finance: the dominance of history in decisions

Lagged values of corporate finance decisions are known to be economically important, but most analyses ignore them. This article examines the influence on five key financial decisions of previous decisions using a data set that includes industry census data. It finds that lagged values explain betwe...

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Bibliographic Details
Published inApplied economics Vol. 46; no. 33; pp. 4104 - 4115
Main Author Coleman, Les
Format Journal Article
LanguageEnglish
Published London Routledge 01.01.2014
Taylor & Francis Ltd
Subjects
agents' control
Censuses
Corporate finance
Data analysis
Decision analysis
Decision making
Economic models
History
Investment
Parameter estimation
Regression analysis
Studies
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Summary:Lagged values of corporate finance decisions are known to be economically important, but most analyses ignore them. This article examines the influence on five key financial decisions of previous decisions using a data set that includes industry census data. It finds that lagged values explain between 25% and 36% of decisions on leverage, payout and investment, which gives them strong predictive ability. In regression of these decisions on firm and industry traits, omission of lagged values leads to a change of around one-third in parameter estimates, and so significantly overstates their impact. The influence of lagged values persists, and for most decisions is significant for several years. Given the stickiness in financial decisions, there are potentially significant analytical problems from ignoring their lagged values.
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ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2014.952889