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Investment and financing constraints: importance of the business cycle - An estimation on French data

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In this paper we study the influence of financial constraints on the investment behavior of French firms by estimating the Euler equation for investment on a large panel of firms over the period 1986-1994. In particular we emphasize the impact of the firm's level of collateral on its external financial cost. We assume that the rate at which the firm can borrow is linked to the firm's debt to tangible fixed assets ratio through a premium added to the safe interest rate. We derive the Euler equation from a structural model of investment and estimate our model on data on individual French firms from 1987 to 1994 by using generalized method of moments (GMM). Our empirical findings show that the level of the firm's collateral explains significant differences in the investment behavior of firms. Moreover this effect is found to vary across different subsamples of firms, divided according to size or sector, but also during the business cycle. Compared to the safe interest rate the external financing premium appears significant especially at the end of the period studied. However compared to the economic return on investment the external premium does not appear significant in most cases. So the external financing appears to play a significant role only for small industrial firms and only at the end of period.

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File Function: Document de travail de la DESE numéro G2000-05
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Paper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2000-05.

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Date of creation: 2000
Handle: RePEc:crs:wpdeee:g2000-05
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