Redefining Financial Constraints: A Text-Based Analysis

62 Pages Posted: 17 Mar 2012  

Christopher Ball

Meta Heuristica, LLC

Gerard Hoberg

University of Southern California - Marshall School of Business

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Date Written: February 7, 2012

Abstract

We score text in firms' 10-Ks to obtain for each firm an annual measure of investment delays due to financial constraints and separate measures of each firm's marginal constraints due to concerns with equity and debt financing.Contrary to the focus in the literature, we find that the key constraints are the financing of R&D expenditures rather than capital expenditures, and that the main friction firms face is raising equity capital to fund growth opportunities. We also find debt-market constrained firms more closely resemble distressed firms funding CAPX. Our measures predict investment cuts following the financial crisis better than other indices of financial constraints used in the literature. Since constraints are most binding within the populations of small and young rms these results point to the challenges that the financial system faces in funding innovation.

Keywords: investment, financial constraint, equity, debt issuance, CAPX, R&D

JEL Classification: G31, G32, G30

Suggested Citation

Ball, Christopher and Hoberg, Gerard and Maksimovic, Vojislav, Redefining Financial Constraints: A Text-Based Analysis (February 7, 2012). Available at SSRN: https://ssrn.com/abstract=2023828 or http://dx.doi.org/10.2139/ssrn.2023828

Christopher Ball

Meta Heuristica, LLC ( email )

Fairfax, VA
United States

HOME PAGE: http://www.metaheuristica.com

Gerard Hoberg

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

Vojislav Maksimovic (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

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