Equity and Debt Financing Constraints

49 Pages Posted: 14 Mar 2011 Last revised: 13 Mar 2015

See all articles by Jie Yang

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: March 8, 2015


I construct a structural model in which firms maximize value conditional on being restricted from issuing equity and unsecured debt. Using GMM estimation, I find that a model with both equity and debt constraints fits better than models without constraints or with only one constraint. The estimated financing constraint measures are consistent with financing behavior and firm characteristics believed of constrained firms, with debt being the limiting constraint. Furthermore, equity constrained firms decrease R&D expenses over the next period while debt constrained firms decrease capital expenditure. Finally, I find a positive but insignificant risk premium for debt constraints amounting to 3.0% over one year that does not exist for equity constraints.

Keywords: financial constraints, capital structure, investment, equity, debt

JEL Classification: G30, G31, G32

Suggested Citation

Yang, Jie, Equity and Debt Financing Constraints (March 8, 2015). Available at SSRN: https://ssrn.com/abstract=1785066 or http://dx.doi.org/10.2139/ssrn.1785066

Jie Yang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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