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The Sources of Financing Constraints

Author

Listed:
  • Boris Nikolov

    (University of Lausanne; Swiss Finance Institute)

  • Lukas Schmid

    (Duke University - The Fuqua School of Business)

  • Roberto Steri

    (University of Lausanne; Swiss Finance Institute)

Abstract

In order to identify the relevant sources of firms' financing constraints, we ask what financial rictions matter for corporate policies. To that end, we build, solve, and estimate a range of dynamic models of corporate investment and financing, embedding a host of financial frictions. We focus on limited enforcement, moral hazard, and tradeoff models. All models share a common technology, but differ in the friction generating financing constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor trade-off models for larger Compustat firms, limited commitment models for smaller firms, and moral hazard models for private firms. Our estimates point to significant financing constraints due to agency frictions.

Suggested Citation

  • Boris Nikolov & Lukas Schmid & Roberto Steri, 2018. "The Sources of Financing Constraints," Swiss Finance Institute Research Paper Series 18-74, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1874
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3293849
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    Citations

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    Cited by:

    1. Alex Clymo & Filip Rozsypal, 2022. "Firm Cyclicality and Financial Frictions," Discussion Papers 2207, Centre for Macroeconomics (CFM).
    2. Eren, Egemen & Malamud, Semyon, 2022. "Dominant currency debt," Journal of Financial Economics, Elsevier, vol. 144(2), pages 571-589.
    3. Dabla-Norris, Era & Ji, Yan & Townsend, Robert M. & Filiz Unsal, D., 2021. "Distinguishing constraints on financial inclusion and their impact on GDP, TFP, and the distribution of income," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 1-18.

    More about this item

    Keywords

    Financing constraints; financial frictions; moral hazard; limited enforcement; tradeoff; dynamic contracting; agency; structural estimation; empirical policy function estimation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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