Identifying Financial Constraints

62 Pages Posted: 17 Jun 2020

See all articles by Annalisa Ferrando

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB)

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Date Written: June, 2020

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 budget constraints on production inputs 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 popular 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: access to finance, financial constraints, identification, indicators, production function

JEL Classification: E44, G00, G30, G32

Suggested Citation

Ferrando, Annalisa and Mulier, Klaas and Cherchye, Laurens and Rock, Bram De and Verschelde, Marijn, Identifying Financial Constraints (June, 2020). ECB Working Paper No. 20202420, Available at SSRN: https://ssrn.com/abstract=3627029

Annalisa Ferrando (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Klaas Mulier

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

Ghent, B-9000
Belgium

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB) ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France

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