Financial constraints and capacity adjustment in the United Kingdom: evidence from a large panel of survey data
AbstractThe interrelationship between financial constraints and firm activity is a hotly debated issue. The way firms cope with financial constraints is fundamental to the analysis of monetary transmission, of financial stability and of economic growth and development. The CBI Industrial Trends Survey contains detailed information on the financial constraints faced by a large sample of UK manufacturers. This paper uses the quarterly CBI Industrial Trends Survey firm-level data between January 1989 and October 1999. The cleaned sample contains 49,244 quarterly observations on 5,196 firms. The data set is presented and a new method of checking the informational content of the data is developed. The relationship between investment activity and financial constraints is ambivalent because both can affect each other and they are affected by the same kind of economic developments, so it is not clear which is driving the other. But the link between financial constraints faced by the firm and the prevalence and duration of capacity restrictions should be unambiguously positive. Looking at that relationship, two important results emerge. First, financially constrained firms take longer to close capacity gaps. This indicates that financial constraints do indeed play a part in the investment process. Second, small firms close their capacity gaps faster than large firms do, but financial constraints seem to be of higher relevance to their adjustment.
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Date of creation: May 2005
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Other versions of this item:
- von Kalckreuth, Ulf & Murphy, Emma, 2005. "Financial constraints and capacity adjustment in the United Kingdom: Evidence from a large panel of survey data," Discussion Paper Series 1: Economic Studies 2005,01, Deutsche Bundesbank, Research Centre.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-03 (All new papers)
- NEP-CFN-2005-07-03 (Corporate Finance)
- NEP-ENT-2005-07-03 (Entrepreneurship)
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