Testing Financing Constraints on Firm Investment using Variable Capital

56 Pages Posted: 25 Jul 2007

See all articles by Andrea Caggese

Andrea Caggese

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Date Written: August 2006

Abstract

We consider a dynamic multifactor model of investment with financing imperfections, adjustment costs and fixed and variable capital. We use the model to derive a test of financing constraints based on a reduced form variable capital equation. Simulation results show that this test correctly identifies financially constrained firms even when the estimation of firms' investment opportunities is very noisy. In addition, the test is well specified in the presence of both concave and convex adjustment costs of fixed capital. We confirm empirically the validity of this test on a sample of small Italian manufacturing companies.

Keywords: Financing Constraints, Investment

JEL Classification: D21, G31

Suggested Citation

Caggese, Andrea, Testing Financing Constraints on Firm Investment using Variable Capital (August 2006). Available at SSRN: https://ssrn.com/abstract=1002865 or http://dx.doi.org/10.2139/ssrn.1002865

Andrea Caggese (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

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