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
Date Written: August 18, 2015
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: Suggested Citation