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What Can Cash Shortfalls and Windfalls Tell Us About Finance Constraints?

In: The Economics of Imperfect Markets


  • Toni M. Whited

    (University of Rochester)


This paper examines the relative magnitude of financial versus real frictions by looking at how firms react to quasi-exogenous cash shortfalls to pension assets. To answer the question theoretically, we examine a dynamic model of financing and exogenous cash shortfalls. We find that when financing costs are high, firms adjust on real margins and vice versa. We find that firms optimally avoid costly cash shortfalls, only experiencing these events after serious negative shocks to profits. We also find that commonly used regression tests for the presence of finance constraints can produce false positives. In contrast, regression discontinuity techniques can provide an accurate method for uncovering the existence and magnitudes of finance constraints.

Suggested Citation

  • Toni M. Whited, 2010. "What Can Cash Shortfalls and Windfalls Tell Us About Finance Constraints?," Contributions to Economics, in: Giorgio Calcagnini & Enrico Saltari (ed.), The Economics of Imperfect Markets, chapter 0, pages 17-32, Springer.
  • Handle: RePEc:spr:conchp:978-3-7908-2131-4_1
    DOI: 10.1007/978-3-7908-2131-4_1

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    Cited by:

    1. Kim, Tae-Nyun & Kim, Kihun, 2018. "External cost of leverage adjustment: Evidence from defined benefit pension plans," Journal of Economics and Business, Elsevier, vol. 96(C), pages 1-14.
    2. Giorgio Calcagnini & Annalisa Ferrando & Germana Giombini, 2015. "Multiple market imperfections, firm profitability and investment," European Journal of Law and Economics, Springer, vol. 40(1), pages 95-120, August.


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