A New Measure of Financial Constraints Applicable to Private and Public Firms

88 Pages Posted: 18 Aug 2015 Last revised: 21 Jan 2019

See all articles by Catharina Schauer (neé Klepsch)

Catharina Schauer (neé Klepsch)

Ludwig Maximilians University of Munich - Faculty of Business Administration (Munich School of Management)

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Nikolas Breitkopf

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: January 4, 2019

Abstract

We study managers’ self-assessment of their firm’s financial constraint status to assess the validity of commonly used indicators of financial constraints. As categorizations based on common financial constraints measures lead to high misclassifications, we derive a new measure of financial constraints which performs well in-sample and out-of-sample for private firms. Applying our new measure to a large sample of private European firms, we find consistently lower investment-cash flow sensitivities and greater distortions in response to exogenous financing frictions for constrained firms across countries. Besides private firms, our new measure can also be applied to listed U.S. firms, as it reliably identifies constrained firms as measured by the occurrence of liquidity events and the incidence of an inelastic capital supply.

Keywords: Financial constraints, Private firms, Survey data, Forecast accuracy, Liquidity events

JEL Classification: C23, C52, D92, G31, G32

Suggested Citation

Schauer, Catharina and Elsas, Ralf and Breitkopf, Nikolas, A New Measure of Financial Constraints Applicable to Private and Public Firms (January 4, 2019). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2646759 or http://dx.doi.org/10.2139/ssrn.2646759

Catharina Schauer (Contact Author)

Ludwig Maximilians University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Nikolas Breitkopf

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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