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Identifying Financial Constraints

Author

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

Abstract

We propose a new methodology to recover firm-year level financial constraints from firms' production behavior. We model financial constraints as the profitability that firms forgo when budget constraints on input costs bind, impeding them from using the optimal level inputs and technology in the production process. We estimate and 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 and 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, 2020. "Identifying Financial Constraints," Working Papers ECARES 2020-04, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/302090
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