Identifying Financial Constraints from Production Data

70 Pages Posted: 6 Nov 2018 Last revised: 2 Dec 2019

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

Farre-Mensa and Ljungqvist (2016, RFS) argue that the widely used measures of financial constraints fail to measure financial constraints. We propose a new methodology to recover firm-year level financial constraints from firms' production behavior. In particular, we measure financial constraints as the profitability that firms forgo when binding constraints on input costs impede them from using the optimal level of production inputs and technology. We validate our measure using a unique dataset combining firms' balance sheets from 2005 to 2015 in five Euro Area countries with survey information on firms' self-reported financial constraints, such as actual loan rejections or discouragement. Further, we show that our measure recovers the country-specific trends of financial constraints during the financial crisis and the sovereign debt crisis, and correlates only weakly with the three most popular indices of financial constraints.

Keywords: financial constraints

Suggested Citation

Cherchye, Laurens and De Rock, Bram and Ferrando, Annalisa and Mulier, Klaas and Verschelde, Marijn, Identifying Financial Constraints from Production Data (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
Gent, 9000
Belgium

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