Bank Lending, Financing Constraints and SME Investment
University of Granada - Department of Economic Theory and History
Gregory F. Udell
Indiana University - Department of Finance
Bangor Business School
November 12, 2008
21st Australasian Finance and Banking Conference 2008 Paper
Investment opportunities depend on the level of financing constraints. Earlier research has mainly focused on the controversial argument that cash flow-investment correlations increase with the level of these constraints. We side-step this controversy by focusing on bank loans rather than cash flow based on the argument that access to bank lending reduces financing constraints. We also focus on a subset of firms that are likely more vulnerable to financing constraints, small and mid-sized enterprises. Our results show that bank loans predict investment for unconstrained firms, but not for constrained firms, and trade credit predicts investment, but only for constrained firms.
Number of Pages in PDF File: 41
Keywords: SMEs, financing constraints, bank lending, trade credit, predictability
JEL Classification: G21, D21, L16working papers series
Date posted: September 10, 2008 ; Last revised: November 16, 2008
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