Do Firms that State They are Financially Constrained Tend to Reinvest More of Their Profits?

41 Pages Posted: 29 Jun 2023

See all articles by Julio Riutort

Julio Riutort

Universidad Adolfo Ibáñez

Rodrigo Andres Wagner

UAI Business School ; Growth Lab - Harvard University (Center for Int. Development)

gonzalo iberti

affiliation not provided to SSRN

Abstract

Firms in global surveys often state that access to finance is their primary obstacle to growth. However, merely stating that access to finance is an obstacle does not necessarily imply the firm is financially constrained. We examine the idea that firms facing external finance constraints should in theory reinvest profits more heavily, as some canonical models in financial economics predict. We test this prediction using global firm surveys from 2006 to 2019. We do not find such higher profit reinvestment among firms that \textit{state} finance is their most important obstacle. This puzzling null finding is robust to alternative measures of profit reinvestment and many alternative confounders. In contrast to stated constraints, profit reinvestment is in fact higher for non-stated measures of financial constraints (e.g. younger or smaller firms, as well as firms in sectors with fewer tangible assets). Overall, our findings suggest that these self-assessments of a main obstacle might be due to other reasons, beyond access to funds that finance capital investment.

Keywords: Financial ConstraintsEntrepreneurshipSMEsRetained EarningsBootstrapping

Suggested Citation

Riutort, Julio and Wagner, Rodrigo Andres and iberti, gonzalo, Do Firms that State They are Financially Constrained Tend to Reinvest More of Their Profits?. Available at SSRN: https://ssrn.com/abstract=4495431 or http://dx.doi.org/10.2139/ssrn.4495431

Julio Riutort (Contact Author)

Universidad Adolfo Ibáñez ( email )

Diagonal Las Torres 2640
Peñalolén
Santiago
Chile
56-2-2331-1077 (Phone)

HOME PAGE: http://https://sites.google.com/site/jriutort/

Rodrigo Andres Wagner

UAI Business School

Diagonal Las Torres 2700
Penalolen
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/rodrigoawagner

Growth Lab - Harvard University (Center for Int. Development) ( email )

79 John F. Kennedy Street
Cambridge, MA MA 02138
United States

Gonzalo Iberti

affiliation not provided to SSRN

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