Applications of simultaneous equations in finance research: methods and empirical results

Cheng Few Lee, Woan-lih Liang (), Fu-Lai Lin () and Yating Yang ()
Additional contact information
Woan-lih Liang: National Chiao Tung University
Fu-Lai Lin: Da-Yeh University
Yating Yang: National Chiao Tung University

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 4, No 3, 943-971

Abstract: Abstract The main purposes of this paper are: (1) to review finance literature using simultaneous equations method, (2) to discuss the difference among two-stage least squares (2SLS), three-stage least squares (3SLS) and generalized method of moments (GMM) methods under different assumptions, and (3) to investigate the interrelationship among investment, financing, and dividend decisions as an example to demonstrate the discussion. We review studies that apply the simultaneous equations estimation on capital structure, corporate investment, payout decisions, ownership structure, corporate governance, stock return, firm performance and/or other corporate issues. In addition to these three methods, we also present Pagan and Hall’s (Econom Rev 2:159–218, 1983) test of heteroskedasticity and weak instruments test for selecting the applicable method and testing the validity of instruments. Finally, we investigate the interrelationship among investment, financing and dividend decisions using 2SLS, 3SLS, and GMM methods based on the US listed firm annual data between 1965 and 2012. Our results show that these three corporate decisions are co-determined and the interaction among them should be taken into account in a simultaneous equations framework.

Keywords: 2SLS; 3SLS; GMM; Investment decision; Financing decision; Dividend decision (search for similar items in EconPapers)
JEL-codes: C18 C30 C36 G10 G30 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-015-0526-0 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0526-0

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-015-0526-0

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().