Do Measures of Financial Constraints Measure Financial Constraints?
Harvard Business School
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)
August 18, 2015
Review of Financial Studies, Forthcoming
Financial constraints are fundamental to empirical research in finance and economics. We propose two tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms typically classified as constrained do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders. Our evidence suggests that extant findings that have been attributed to constraints may instead reflect differences in the growth and financing policies of firms at different stages of their lifecycles.
Number of Pages in PDF File: 61
Keywords: Financial constraints
JEL Classification: G32, G31, G33
Date posted: October 11, 2013 ; Last revised: August 19, 2015
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