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Identifying Financial Constraints from Production Data

Author

Listed:
  • Laurens Cherchye
  • Bram De Rock
  • Annalisa Ferrando
  • Klaas Mulier
  • Marijn Verschelde

Abstract

Farre-Mensa and Ljungqvist (2016, RFS) argue that the existing and widely used measures of financial constraints are inadequate and fail to measure financial constraints. We propose a new methodology to recover firm-year level financial constraints from firms' production behavior. In particular, we measure financial constraints as the profitability that firms forgo when binding constraints on input costs impede them from using the optimal level of inputs and technology. We validate our measure using a unique dataset combining firms' balance sheets from 2005 to 2015 in five Euro Area countries with survey information on firms' self-reported financial constraints, such as actual loan rejections or discouragement. Further, we show that our measure recovers the country-specific trends of financial constraints during the financial crisis and the sovereign debt crisis, and correlates only weakly with the three most popular indices of financial constraints.

Suggested Citation

  • Laurens Cherchye & Bram De Rock & Annalisa Ferrando & Klaas Mulier & Marijn Verschelde, 2018. "Identifying Financial Constraints from Production Data," Working Papers ECARES 2018-31, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/277994
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    References listed on IDEAS

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    2. Nguyen Thanh Liem & Nguyen Vinh Khuong & Thai Hong Thuy Khanh, 2019. "Firm Constraints on the Link between Proactive Innovation, Open Innovation and Firm Performance," JOItmC, MDPI, vol. 5(4), pages 1-15, October.

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