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Investment-cash flow sensitivities, credit rationing and financing constraints

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Author Info

  • Becchetti, Leonardo

    (Faculty of Economics, University of Rome "Tor Vergata")

  • Castelli, Annalisa

    (Faculty of Economics, University of Rome "Tor Vergata")

  • Hasan, Iftekhar

    ()
    (Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY 12180-3590 and Bank of Finland Research)

Abstract

The controversy over whether investment-cash flow sensitivity is a good indicator of financing constraints is still unresolved. We tackle it from several different angles and cross-validate our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing constraints. Our qualitative information shows that (self-declared) credit rationing is (weakly) related to both traditional a priori factors – such as firm size, age and location – and lenders’ rational decisions based on their credit risk models. We use our qualitative information on firms that were denied credit to provide evidence relevant to the investment-cash flow sensitivity debate. Our results show that self-declared credit rationing significantly discriminates between firms that do and do not have such sensitivity, whereas a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment-cash flow sensitivity), which supports the more recent empirical evidence in this direction.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0815netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 15/2008.

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Length: 64 pages
Date of creation: 24 Jun 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_015

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: financing constraints; credit rationing; investment/cash flow sensitivity;

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Cited by:
  1. Annie bellier & Wafa Sayeh & Stéphanie Serve, 2012. "What lies behind credit rationing? A survey of the literature," THEMA Working Papers 2012-39, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Cinquegrana, Giuseppe & Donati, Cristiana & Sarno, Domenico, 2012. "Financial constraints and relationship lending in the growth of italian SMEs," MPRA Paper 39825, University Library of Munich, Germany.
  3. Brancati, Emanuele, 2013. "Innovation activity and nancing constraints: evidence from Italy during the crises," MPRA Paper 47750, University Library of Munich, Germany.
  4. Maria Luisa Mancusi & Andrea Vezzulli, 2013. "R&D and Credit Rationing in SMEs," Working Papers Department of Economics 2013/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Leonardo Becchetti & Melody Garcia & Giovanni Trovato, 2009. "Credit rationing and credit view: empirical evidence from loan data," CEIS Research Paper 144, Tor Vergata University, CEIS, revised 30 Sep 2009.

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