Abstract

http://ssrn.com/abstract=2338575
 
 

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Do Measures of Financial Constraints Measure Financial Constraints?


Joan Farre-Mensa


Harvard Business School

Alexander Ljungqvist


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)

December 9, 2014


Abstract:     
Financial constraints are fundamental to empirical research in finance and economics. We propose two novel tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms classified as constrained according to five popular measures 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. We propose an alternative proxy for financial constraints, based on Merton’s (1974) distance-to-default measure, which successfully identifies firms whose behavior is consistent with being constrained.

Number of Pages in PDF File: 54

Keywords: Financial constraints

JEL Classification: G32, G31, G33

working papers series





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Date posted: October 11, 2013 ; Last revised: December 10, 2014

Suggested Citation

Farre-Mensa, Joan and Ljungqvist, Alexander, Do Measures of Financial Constraints Measure Financial Constraints? (December 9, 2014). Available at SSRN: http://ssrn.com/abstract=2338575 or http://dx.doi.org/10.2139/ssrn.2338575

Contact Information

Joan Farre-Mensa (Contact Author)
Harvard Business School ( email )
Rock Center 218
Soldiers Field Road
Boston, MA 02163
United States
617-495-6963 (Phone)
HOME PAGE: http://people.hbs.edu/jfarremensa
Alexander Ljungqvist
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
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