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Cambridge Endowment for Research in Finance (CERF)


PI: Prof. Bart Lambrecht (award holder)

Dr Shiqi Chen (co-investigator)

Project Period: February 2021 - February 2023

This research studies the dynamics of the three main corporate policies: the investment, financing and payout decisions. We first study how these
decisions interact, and whether the theories of corporate capital structure and payout can be reconciled with each other given these interactions. Next, we study investment and payout decisions made by a group of investors. We examine the formation, composition, organizational and legal structure of the decision-making coalitions.

Traditionally, the finance literature has studied the firm's three main financial policies in isolation. However, in reality these three key corporate decisions are not independent as they are linked by the firm's sources and uses of funds constraint. The interdependencies between the firm's policies raise many questions that have not been recognized in the existing literature. For example, if we believe that firms follow a target leverage ratio, what are the implications for the dynamics of payout and investment? Alternatively, what are the implications for payout and investment if firms follow a pecking order policy? Our research aims to explore these questions from a theoretical perspective, with a view to produce empirical predictions as to how payout, investment and capital interact.

In the second project, we study the choice of a firm’s legal business structure. In particular, we examine how the sharing rules, corporate taxes, limited liability, and capital constraints affect investors’ choice of forming a partnership or a corporation. We further study how these factors influence the composition of the firm, and its subsequent investment, financing, and labour decisions.

Project Update - August 2021

Project Update - April 2021