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Bank lending, financing constraints and SME investment

Author

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  • Santiago Carbo-Valverde
  • Francisco Rodriguez-Fernandez
  • Gregory F. Udell

Abstract

SME investment opportunities depend on the level of financing constraints that firms face. Earlier research has mainly focused on the controversial argument that cash flow-investment correlations increase with the level of these constraints. We focus on bank loans rather than cash flow. Our results show that investment is sensitive to bank loans for unconstrained firms but not for constrained firms, and trade credit predicts investment, but only for constrained firms. We also find that unconstrained firms use bank loans to finance trade credit provided to other firms. Our results illustrate alternative mechanisms that firms employ both as borrowers and lenders.

Suggested Citation

  • Santiago Carbo-Valverde & Francisco Rodriguez-Fernandez & Gregory F. Udell, 2008. "Bank lending, financing constraints and SME investment," Working Paper Series WP-08-04, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-08-04
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    References listed on IDEAS

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    2. Casey, Eddie & O'Toole, Conor M., 2014. "Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 173-193.

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