Redefining Financial Constraints: A Text-Based Analysis
Meta Heuristica, LLC
University of Southern California - Marshall School of Business
University of Maryland - Robert H. Smith School of Business
February 7, 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 rms these results point to the challenges that the financial system faces in funding innovation.
Number of Pages in PDF File: 62
Keywords: investment, financial constraint, equity, debt issuance, CAPX, R&D
JEL Classification: G31, G32, G30
Date posted: March 17, 2012
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