Identifying Financial Constraints

58 Pages Posted: 6 Nov 2018 Last revised: 22 Jun 2022

See all articles by Laurens Cherchye

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Marijn Verschelde

Ghent University

Date Written: November 5, 2018

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

Suggested Citation

Cherchye, Laurens and De Rock, Bram and Ferrando, Annalisa and Mulier, Klaas and Verschelde, Marijn, Identifying Financial Constraints (November 5, 2018). Available at SSRN: https://ssrn.com/abstract=3278938 or http://dx.doi.org/10.2139/ssrn.3278938

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Av. F. D. Roosevelt, 50
CP 114
Brussels, B-1050
Belgium

Annalisa Ferrando

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Klaas Mulier (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Marijn Verschelde

Ghent University ( email )

Coupure Links 653
Ghent, 9000
Belgium

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