Essays on the dynamics of qualitive aspects of firms' behavior

This dissertation contains two independent but related papers which investigate theoretically and empirically qualitative aspects of firms' behavior in dynamic settings.

CHAPTER 1.

ENDOGENOUS ATTRITION OF FIRMS: An Investigation with COMPUSTAT Data

Chapter One develops a dynamic programming model of firms' attrition and investigates econometric aspects of firms' exit decisions. Structural econometric analyses of exit decisions of firms involve rather naturally a number of qualitative dimensions. This chapter investigates the exit decision empirically by means of panel data from COMPUSTAT for U.S. manufacturing firms which are publicly traded. A number of different techniques are employed, which include Poisson models, structural form models and duration models.

Our findings show that observable characteristics of the individual firms are important in understanding the dynamics of firm's attrition. Cyclical effects and macroeconomic variables have also a strong impact on bankruptcies, liquidations and reorganizations. Unobserved firm heterogeneity, modeled by means of random effects, is not significant in explaining exit decisions by firms. Firms' attrition is more likely to result from random events at the time of exit.

CHAPTER 2

AN EMPIRICAL INVESTIGATION ON THE DYNAMICS OF QUALITATIVE DECISIONS OF FIRMS

Chapter Two focuses on qualitative aspects of financing, investment and output decisions of firms. Such dimensions can be modeled econometrically by means of dynamic limited dependent variables models. We develop a partial equilibrium dynamic stochastic programming problem of investment, dividend and financing decisions for a typical firm and we use it to examine firms' behavior under exogenous borrowing constraints.

We use panel data from COMPUSTAT for publicly traded U.S. manufacturing firms. We apply limited dependent variable models' techniques to study the discrete decisions of whether or not firms pay dividends, or whether they use borrowing or equity issue financing for investment. We study the pattern of transitions over time across various regimes that represent alternative modes of finance while controlling for individual heterogeneity with a general stochastic structure for unobservables. Structural form models show considerable success in explaining the dynamics of such decisions, with individual characteristics of the firms which include firm fundamentals, and lagged values of the decisions, showing a strong explanatory impact. The dynamics of the estimated models reveal high persistence in manufacturing firms to repeat their last period’s decision. Firm heterogeneity modeled by means of random effects, explains also a significant part of firms' qualitative decisions.