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Financial frictions and the K/L ratio in UK manufacturing industries


  • Marina-Eliza Spaliara

    () (Dept of Economics, Loughborough University)


Using comprehensive financial data on UK unquoted firms, we investigate whether technological differences of UK manufacturing industries influence the response of firms' capital-labour ratio (K/L) to changes in financial indicators under capital market imperfections. The results reveal that cash flow has a positive impact on the K/L ratio for constrained firms in high tech industries and a negative impact for firms with similar characteristics in low tech industries. Specifically, the sensitivity of the K/L ratio to cash flow not only depends on firms' net worth and financial frictions, but most importantly on firms' industry affiliation.

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  • Marina-Eliza Spaliara, 2010. "Financial frictions and the K/L ratio in UK manufacturing industries," Discussion Paper Series 2010_7, Department of Economics, Loughborough University.
  • Handle: RePEc:lbo:lbowps:2010_7

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    1. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August.
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    6. Vermeulen, Philip & Mizen, Paul, 2005. "Corporate investment and cash flow sensitivity: what drives the relationship?," Working Paper Series 485, European Central Bank.
    7. Spiros Bougheas & Paul Mizen & Cihan Yalcin, 2004. "Access to External Finance : Theory and Evidence on the Impact of Firm-Specific Characteristics," Working Papers 0406, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    8. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
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