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Do firms that state they are financially constrained tend to reinvest more of their profits?

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  • Figueroa, Camila
  • Iberti, Gonzalo
  • Riutort, Julio
  • Wagner, Rodrigo

Abstract

Firms in global surveys often state that access to finance is their primary obstacle to growth. However, merely stating that access to finance is an obstacle does not necessarily imply the firm is financially constrained. We examine the idea that firms facing external finance constraints should in theory reinvest profits more heavily, as some canonical models in financial economics predict. We test this prediction using global firm surveys from 2006 to 2019. We do not find such higher profit reinvestment among firms that state finance is their most important obstacle. This puzzling null finding is robust to alternative measures of profit reinvestment and many alternative confounders. In contrast to stated constraints, profit reinvestment is in fact higher for non-stated measures of financial constraints (e.g. younger or smaller firms, as well as firms in sectors with fewer tangible assets). Overall, our findings suggest that these self-assessments of a main obstacle might be due to other reasons, beyond access to funds that finance capital investment.

Suggested Citation

  • Figueroa, Camila & Iberti, Gonzalo & Riutort, Julio & Wagner, Rodrigo, 2023. "Do firms that state they are financially constrained tend to reinvest more of their profits?," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004180
    DOI: 10.1016/j.irfa.2023.102902
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    More about this item

    Keywords

    Financial constraints; Entrepreneurship; SMEs; Retained earnings; Bootstrapping; Growth diagnostics;
    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
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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