The Sources of Financing Constraints

75 Pages Posted: 3 Dec 2018 Last revised: 7 Dec 2019

See all articles by Boris Nikolov

Boris Nikolov

University of Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Lukas Schmid

University of Southern California - Marshall School of Business

Roberto Steri

University of Luxembourg

Date Written: November 30, 2018


In order to identify the relevant sources of firms' financing constraints, we ask what financial frictions matter for corporate policies. To that end, we build, solve, and estimate a range of dynamic models of corporate investment and financing, embedding a host of financial frictions. We focus on limited enforcement, moral hazard, and trade-off models. All models share a common technology, but differ in the friction generating financing constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model or model combination performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor trade-off models for larger Compustat firms, limited commitment models for smaller firms, and moral hazard models for private firms. Our estimates point to significant financing constraints due to agency frictions and highlight the importance of identifying their relevant sources for firm valuation.

Keywords: Financing constraints, financial frictions, moral hazard, limited enforcement, tradeoff, dynamic contracting, agency, structural estimation, empirical policy function estimation

JEL Classification: G31, G32

Suggested Citation

Nikolov, Boris and Schmid, Lukas and Steri, Roberto, The Sources of Financing Constraints (November 30, 2018). Swiss Finance Institute Research Paper No. 18-74, European Corporate Governance Institute – Finance Working Paper No. 641/2019, Available at SSRN: or

Boris Nikolov (Contact Author)

University of Lausanne ( email )

Lausanne, CH-1015

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Roberto Steri

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi

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