Abstract

http://ssrn.com/abstract=2338575
 
 

Citations (1)



 


 



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)

May 5, 2014


Abstract:     
Financial constraints are not directly observable, so empirical research relies on indirect measures. We evaluate how well five popular measures (paying dividends, having a credit rating, and the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices) identify firms that are financially constrained, using three novel tests: an exogenous increase in a firm’s demand for credit; exogenous variation in the supply of bank loans; and the tendency for firms to pay out the proceeds of equity issues to their shareholders (“equity recycling”). We find that none of the five measures identifies firms that behave as if they were constrained: public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in equity recycling. On the other hand, the behavior of all but the largest privately held firms and public firms with below investment-grade ratings is consistent with (but does not necessarily prove) the hypothesis that they are financially constrained.

Number of Pages in PDF File: 59

Keywords: Financial constraints

JEL Classification: G32, G31, G33

working papers series





Download This Paper

Date posted: October 11, 2013 ; Last revised: May 6, 2014

Suggested Citation

Farre-Mensa, Joan and Ljungqvist, Alexander, Do Measures of Financial Constraints Measure Financial Constraints? (May 5, 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
Feedback to SSRN


Paper statistics
Abstract Views: 2,688
Downloads: 972
Download Rank: 11,456
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.328 seconds