Redefining Financial Constraints: A Text-Based Analysis
Meta Heuristica, LLC
University of Maryland - Department of Finance
University of Maryland - Robert H. Smith School of Business
November 1, 2012
We score text in firms' 10-Ks to obtain for each firm an annual measure of investment delays due to financial constraints and separate measures of each firm's marginal constraints due to concerns with equity and debt financing. Contrary to the focus in the literature, we find that the key constraints are the financing of R&D expenditures rather than capital expenditures, and that the main friction firms face is raising equity capital to fund growth opportunities. We also find debt-market constrained firms more closely resemble distressed firms funding CAPX. Our measures predict investment cuts following the financial crisis better than other indices of financial constraints used in the literature. Since constraints are most binding within the populations of small and young firms, these results point to the challenges that the financial system faces in funding innovation.
Number of Pages in PDF File: 56
Keywords: Financial Constraints, Research and Development, Equity Issuance, Debt Issuance, Text-Based Analysis
JEL Classification: G31, G32, D92working papers series
Date posted: September 8, 2011 ; Last revised: May 12, 2013
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