Bank Lending, Financing Constraints and SME Investment
41 Pages Posted: 10 Sep 2008 Last revised: 14 May 2014
Date Written: November 12, 2008
Investment opportunities depend on the level of financing constraints. Earlier research has mainly focused on the controversial argument that cash flow-investment correlations increase with the level of these constraints. We side-step this controversy by focusing on bank loans rather than cash flow based on the argument that access to bank lending reduces financing constraints. We also focus on a subset of firms that are likely more vulnerable to financing constraints, small and mid-sized enterprises. Our results show that bank loans predict investment for unconstrained firms, but not for constrained firms, and trade credit predicts investment, but only for constrained firms.
Keywords: SMEs, financing constraints, bank lending, trade credit, predictability
JEL Classification: G21, D21, L16
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