THE PROBLEM of capital budgeting is one that affects the entire structure of the modern corporation. Its solution determines the very nature of that corporation. Thus the capital budget has been treated at great length in the economic literature. In most of this work it has been explicitly recognized that the components of the capital budget are jointly determined. The investment, dividend, and financing decisions are tied together by the "uses equals sources" identity, a simple accounting identity which requires that all capital invested or distributed to stockholders be accounted for. Despite the obviousness of this relationship, however, very few attempts have been made to incorporate it into an econometric model. Instead most of the empirical work in this area has concentrated on the components of the capital budget separately. It is the purpose of this paper to describe an econometric model that explicitly recognizes the "uses equals sources" identity. In the empirical work described in this paper the capital budget was broken into its five basic components: dividends, short-term investment, gross longterm investment, debt financing, and new equity financing. The first three are uses of funds while the latter two are sources. The dividends component includes all cash payments to stockholders and must be nonnegative. Short-term investment is the net change in the corporation's holdings of short-term assets during the period. These assets include both inventories and short-term financial assets, such as cash, government securities, and trade credits. This component of the capital budget can be either positive or negative. Long-term investment is defined as the change in gross long-term assets during the period. Thus the replacement of worn-out equipment is considered to be positive investment. Long-term investment can be negative but only if the sale of long-term assets exceeds this replacement investment. The debt finance component is simply the net change in the corporation's liabilities. These liabilities include corporate bonds, bank loans, taxes owed, and other accounts payable. Since a corporation can either increase its liabilities or retire those already existing, this variable can be either positive or negative. Finally, new equity financing is the change in stockholder's equity minus the amount due to retained earnings. This should represent the capital raised by the sale of new shares of common stock. Although individual corporations frequently repurchase stock already sold, this variable is almost always positive when aggregated. The first step in this work was to develop a model that describes the optimal capital budget as a function of a set of predetermined variables.' The first of