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Testing financial constraints on firm investment using variable capital

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  • Andrea Caggese

Abstract

We consider a dynamic multifactor model of investment with financing imperfections, adjustment costs and fixed and variable capital. We use the model to derive a test of financing constraints based on a reduced form variable capital equation. Simulation results show that this test correctly identifies financially constrained firms even when the estimation of firms’ investment opportunities is very noisy. In addition, the test is well specified in the presence of both concave and convex adjustment costs of fixed capital. We confirm empirically the validity of this test on a sample of small Italian manufacturing companies.
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(This abstract was borrowed from another version of this item.)

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  • Andrea Caggese, 2004. "Testing financial constraints on firm investment using variable capital," Money Macro and Finance (MMF) Research Group Conference 2003 9, Money Macro and Finance Research Group.
  • Handle: RePEc:mmf:mmfc03:9
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    Cited by:

    1. Bazdresch, Santiago, 2013. "The role of non-convex costs in firms' investment and financial dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 929-950.
    2. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
    3. Giuseppe Bonazzi & Mattia Iotti, 2016. "Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow ( DCF ) Approach of Appraisal," Sustainability, MDPI, Open Access Journal, vol. 8(3), pages 1-17, March.
    4. Christian Bayer, 2001. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Discussion Papers in Economics 01_13, University of Dortmund, Department of Economics.
    5. Caggese, Andrea, 2007. "Financing constraints, irreversibility, and investment dynamics," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2102-2130, October.
    6. Agustinus Prasetyantoko, 2006. "Financing Constraint and Firm Investment Following a Financial Crisis in Indonesia," Post-Print halshs-00133964, HAL.
    7. Andrea Caggese, 2005. "Financing Imperfections and the Investments Decisions of Privately Owned Firms," Working Papers 265, Barcelona Graduate School of Economics.
    8. Becchetti, Leonardo & Castelli, Annalisa & Hasan, Iftekhar, 2008. "Investment-cash flow sensitivities, credit rationing and financing constraints," Research Discussion Papers 15/2008, Bank of Finland.
    9. Mattia Iotti & Giuseppe Bonazzi, 2016. "Assessment of Biogas Plant Firms by Application of Annual Accounts and Financial Data Analysis Approach," Energies, MDPI, Open Access Journal, vol. 9(9), pages 1-19, September.
    10. Andrea Caggese & Vicente Cuñat, 2008. "Financing Constraints and Fixed-term Employment Contracts," Economic Journal, Royal Economic Society, vol. 118(533), pages 2013-2046, November.
    11. Chris Edson, 2012. "The capital constraining effects of the norwegian wealth tax," Discussion Papers 724, Statistics Norway, Research Department.
    12. Guariglia, Alessandra & Tsoukalas, John & Tsoukas, Serafeim, 2012. "Investment, irreversibility, and financing constraints: Evidence from a panel of transition economies," Economics Letters, Elsevier, vol. 117(3), pages 582-584.
    13. Bayer, Christian, 2008. "On the interaction of financial frictions and fixed capital adjustment costs: Evidence from a panel of German firms," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3538-3559, November.
    14. Jones, John Bailey & Pratap, Sangeeta, 2017. "An Estimated Structural Model of Entrepreneurial Behavior," Working Paper 17-7, Federal Reserve Bank of Richmond.
    15. repec:gam:jsusta:v:8:y:2016:i:3:p:268:d:65781 is not listed on IDEAS
    16. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, "undated". "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
    17. Bellmann, Lutz & Gerner, Hans-Dieter & Hübler, Olaf, 2013. "Investment under Company-Level Pacts," IZA Discussion Papers 7195, Institute for the Study of Labor (IZA).
    18. Santiago Carbó Valverde & Francisco Rodríguez-Fernández & Gregory F. Udell, 2008. "Bank lending, financing constraints and SME investment," Working Paper Series WP-08-04, Federal Reserve Bank of Chicago.

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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