Quantifying Reduced-Form Evidence on Collateral Constraints

Abstract

This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic model of investment with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced-form coefficient from the recent corporate finance literature that connects exogenous shocks to debt capacity to corporate investment. We embed the estimated model in a simple general equilibrium framework and find that, relative to a frictionless benchmark, collateral constraints induce output losses of 7.1%, and TFP (misallocation) losses of 1.4%. We show that these estimated economic losses tend to be more robust to misspecification than estimates obtained by targeting leverage.

Keywords: Structural model, Financing Constraint, Aggregate Implications

JEL Classification: G32, D92, E10