Identifying Financial Constraints

Abstract

We propose a new methodology to recover firm-time varying financial constraints from firms' production behavior. We model financial constraints as the profitability that firms forgo when firm growth constraints bind, impeding them from using the optimal level of inputs and technology. We estimate and validate our measure using unique data combining firms' balance sheets with survey information on self-reported financial constraints, like loan rejections. In contrast to three widely used indices of financial constraints, our measure recovers financial constraints beyond observable firm characteristics, recovers cross-sectional and time-varying stylized facts of financial constraints, and is applicable to both public and private firms.

Keywords: financial constraints, identification, access to finance, indicators, production function

JEL Classification: E44, G00, G30, G32