Do Measures of Financial Constraints Measure Financial Constraints?

Review of Financial Studies 29, no. 2 (February 2016): 271-308

61 Pages Posted: 11 Oct 2013 Last revised: 25 Jan 2016

Joan Farre-Mensa

Harvard Business School

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 3 versions of this paper

Date Written: August 18, 2015

Abstract

Financial constraints are fundamental to empirical research in finance and economics. We propose two tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms typically classified as constrained do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders. Our evidence suggests that extant findings that have been attributed to constraints may instead reflect differences in the growth and financing policies of firms at different stages of their lifecycles.

Keywords: Financial constraints

JEL Classification: G32, G31, G33

Suggested Citation

Farre-Mensa, Joan and Ljungqvist, Alexander, Do Measures of Financial Constraints Measure Financial Constraints? (August 18, 2015). Review of Financial Studies 29, no. 2 (February 2016): 271-308. Available at SSRN: https://ssrn.com/abstract=2338575 or http://dx.doi.org/10.2139/ssrn.2338575

Joan Farre-Mensa (Contact Author)

Harvard Business School ( email )

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Alexander Ljungqvist

New York University (NYU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Belgium

Research Institute of Industrial Economics (IFN) ( email )

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