Financial Constraints of EU Firms A Sectoral Analysis

In this paper we provide estimates of financial constraints in all EU sectors. Our empirical strategy consists in using the Orbis firm-level dataset to construct financial constraint measures for each of the firms in our sample, and then aggregate the results either by NACE code, or by business similarity. We use two main – somewhat complementary – financial constraint indices proposed by Ferrando et al (2015), and then submit them to a battery of robustness tests, including the alternative financial constraints estimators developed by Kaplan and Zingales (1997), Whited and Wu (2006), and Hadlock and Pierce (2010). We also establish correlations between a sector’s degree of financial constraints and other sectoral characteristics, such as firm size, TFP, capital intensity, and innovativeness. Among the 10 Target Sub-sectors identified as vulnerable a priori to financial constraints, smaller firms in Marine Fishing and larger firms in Urban Regeneration and Agricultural SMEs stand out as financially constrained by one of our measures. Larger firms in Urban Regeneration even appear in the top ten financially constrained 2-digit NACE sectors (Divisions). When ranking the 88 Target Sectors, NACE Divisions in mining, sports, transports and media and cultural services stand out as particularly financially constrained. A possible explanation is that activities like mining and sports do not belong to public goods typically supported by public grants – or at least not enough in proportion to the massive investments required. As for media and cultural services, these activities suffer from the “curse of intangibles” – the limited access to finance due to the difficulty of valuing the activities and the underlying assets. More generally, tighter sectoral financial constraints tend to be associated with a lower firm size, a capital intensity much higher than average, and a total factor productivity lower than average. Another policyrelevant finding is that different factors for financial constraints apply to different industries: servicesdriven industries are affected by different financially constraining factors than manufacturing or resource extraction related industries. Finally, an unweighted averaging of our measures across countries brings up partially different results than the standard weighted averaging, thus showing that smaller countries may suffer from financial constraints drivers different from larger countries.