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A note on a semiparametric approach to estimating financing constraints in firms

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  • Sumon Kumar Bhaumik
  • Subal C. Kumbhakar
  • Kai Sun

Abstract

In this paper, we present a novel approach to modeling financing constraints of firms. Specifically, we adopt an approach in which firm-level investment is a nonparametric function of some relevant firm characteristics, cash flow in particular. This enables us to generate firm-year specific measures of cash flow sensitivity of investment. We are therefore able to draw conclusions about financing constraints of individual firms as well as cohorts of firms without having to split our sample on an ad hoc basis. This is a significant improvement over the stylized approach that is based on comparison of point estimates of cash flow sensitivity of investment of the average firm of ad hoc sub-samples of firms. We use firm-level data from India to highlight the advantages of our approach. Our results suggest that the estimates generated by this approach are meaningful from an economic point of view and are consistent with the literature.

Suggested Citation

  • Sumon Kumar Bhaumik & Subal C. Kumbhakar & Kai Sun, 2015. "A note on a semiparametric approach to estimating financing constraints in firms," The European Journal of Finance, Taylor & Francis Journals, vol. 21(12), pages 992-1004, September.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:992-1004
    DOI: 10.1080/1351847X.2014.906068
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    Cited by:

    1. Kai Sun & Ruhul Salim, 2020. "A semiparametric stochastic input distance frontier model with application to the Indonesian banking industry," Journal of Productivity Analysis, Springer, vol. 54(2), pages 139-156, December.
    2. Subal C. Kumbhakar & Kai Sun & Rui Zhang, 2016. "Semiparametric Smooth Coefficient Estimation of a Production System," Pacific Economic Review, Wiley Blackwell, vol. 21(4), pages 464-482, October.

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