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Financial constraints and capacity adjustment in the United Kingdom : Evidence from a large panel of survey data

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Author Info
von Kalckreuth, Ulf
Murphy, Emma

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Abstract

The 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 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. As more than 63% of the observations refer to firms with less than 200 employees, the data set is especially well suited for comparing large and small companies. The data set is presented and a new method of checking the informational content of the data is developed. Whereas the relationship between investment activity and financial constraints is theoretically ambivalent due to simultaneity, the link between financial constraints on the one hand and the prevalence and duration of capacity gaps on the other should be unambiguously positive. Looking at the relationship between both types of constraints, two important results emerge. First, there is shown to be informational content in the survey data on financial constraints. Specifically, 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 dynamics. --

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2005,01.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp1:2935

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Related research
Keywords: Financial constraints; investment; capacity adjustment; small firm finance; duration analysis;

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis

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  1. J. B. Chatelain & Andrea Generale & I. Hernando & U. von Kalckreuth & P. Vermeulen, 2001. "Firm investment and monetary transmission in the euro area," Temi di discussione (Economic working papers) 431, Bank of Italy, Economic Research Department. [Downloadable!]
  2. Bronwyn Hall, 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series 1004, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
    Other versions:
  3. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Robert Chirinko & Ulf von Kalckreuth, 2003. "On the German Monetary Transmission Mechanism: Interest Rate and Credit Channels for Investment Spending," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. James Mitchell & Richard J. Smith & Martin R. Weale, 2002. "Quantification of Qualitative Firm-Level Survey Data," Economic Journal, Royal Economic Society, vol. 112(478), pages C117-C135, March. [Downloadable!] (restricted)
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  6. Tiff Macklem, 1997. "Capacity constraints, price adjustment, and monetary policy," Bank of Canada Review, Bank of Canada, vol. 1997(Spring), pages 39-56. [Downloadable!]
  7. von Kalckreuth, Ulf & Jorg Breitung & Robert S Chirinko, 2003. "A Vectorautoregressive Investment Model (VIM) and Monetary Policy Transmission: Panel Evidence from German Firms," Royal Economic Society Annual Conference 2003 213, Royal Economic Society. [Downloadable!]
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  8. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
  9. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 473-94, July. [Downloadable!] (restricted)
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  11. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Ulf von Kalckreuth & Philip Vermeulen, 2003. "New Findings on Firm Investment and Monetary Transmission in the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 73-83.
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  17. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June. [Downloadable!] (restricted)
  18. von Kalckreuth, Ulf & Chirinko, Robert S., 2002. "Further Evidence On The Relationship Between Firm Investment And Financial Status," Discussion Paper Series 1: Economic Studies 2002,28, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  19. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre. [Downloadable!]
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