How Prevalent Are Financial Constraints in the U.S.?

73 Pages Posted: 11 Jan 2022 Last revised: 16 Mar 2022

See all articles by Joan Farre-Mensa

Joan Farre-Mensa

University of Illinois at Chicago - Department of Finance

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Enrique J. Schroth

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Date Written: January 11, 2022

Abstract

We structurally estimate a set of firm- and time-varying measures of the magnitude of external financial constraints. By considering the entire capital structure—equity and debt of various maturities—we identify on which external financing margin(s) a firm is constrained at a given point in time. Using a sample of 10,902 U.S. stock market listed firms from 1989 to 2018, we find that 43% of firm-quarters are equity-constrained but far fewer are constrained to raise short-term debt (33%) or long-term debt (24%). A firm is simultaneously constrained on all three margins only 12% of the time. The prevalence of financial constraints is highly volatile, typically increasing in the runup to and during recessions. While being unconstrained is a persistent state, being constrained is not, with firms that enter a constrained state exiting it again relatively quickly.

Keywords: Financial constraints, Investment, Short-term debt, Long-term debt, Equity, Structural estimation

JEL Classification: D25, E44, G31

Suggested Citation

Farre-Mensa, Joan and Ljungqvist, Alexander and Ljungqvist, Alexander and Schroth, Enrique J., How Prevalent Are Financial Constraints in the U.S.? (January 11, 2022). Swedish House of Finance Research Paper No. 22-05, Available at SSRN: https://ssrn.com/abstract=4006081 or http://dx.doi.org/10.2139/ssrn.4006081

Joan Farre-Mensa

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

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

Enrique J. Schroth

EDHEC Business School ( email )

393, Promenade Des Anglais
Nice, 06202
France
+33493186939 (Phone)

HOME PAGE: http://https://www.edhec.edu/en/faculty-and-researchers/schroth-enrique-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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