Measuring Financing Constraints Using Firm-Level Estimation of Investment-Cash Flow Sensitivities: A Bayesian Approach

Abstract

We employ a Bayesian estimation technique to construct firm-varying investment-cash flow sensitivities (ICFS) for a sample of 90 Spanish listed firms over a 10-year period (1999-2008). Then we analyze which variables are associated with the firm-level ICFS-estimates both univariately and multivariately. The results indicate that firms with high ICFS are capital-intensive firms with high-growth rates that have exhausted much of their debt-capacity. Furthermore, high ICFS-firms have lower liquidity-measures, lower profitability-measures and lower stock-market valuation than their counterparts. These results provide strong evidence that high ICFS-firms have higher financing needs while faced with fewer available financing sources. Our analysis suggests that, at least for Spanish listed firms over the observed sample-period, the ICFS is an adequate proxy to measure the firm’s exposure to financing constraints.

Keywords: Financing constraints, investment-cash flow sensitivities, firm-level estimation, Bayesian estimation

JEL Classification: D92, E22, G30, G31