Financial Constraints and Capacity Adjustment in the United Kingdom: Evidence from a Large Panel of Survey Data

53 Pages Posted: 19 Oct 2005

See all articles by Ulf von Kalckreuth

Ulf von Kalckreuth

Deutsche Bundesbank

Emma Murphy

Bank of England - Financial Stability Assessment Division

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

The interrelationship between financial constraints and firm activity is a hotly debated issue. The way firms cope with financial constraints is fundamental to the analysis of monetary transmission, of financial stability and of economic growth and development. The CBI Industrial Trends Survey contains detailed information on the financial constraints faced by a large sample of UK manufacturers. This paper uses the quarterly CBI Industrial Trends Survey firm-level data between January 1989 and October 1999. The cleaned sample contains 49,244 quarterly observations on 5,196 firms. The data set is presented and a new method of checking the informational content of the data is developed. The relationship between investment activity and financial constraints is ambivalent because both can affect each other and they are affected by the same kind of economic developments, so it is not clear which is driving the other. But the link between financial constraints faced by the firm and the prevalence and duration of capacity restrictions should be unambiguously positive. Looking at that relationship, two important results emerge. First, financially constrained firms take longer to close capacity gaps. This indicates that financial constraints do indeed play a part in the investment process. Second, small firms close their capacity gaps faster than large firms do, but financial constraints seem to be of higher relevance to their adjustment.

Keywords: Financial constraints, investment, capacity adjustment, small firm finance, duration analysis

JEL Classification: D21, D92, C33, C41

Suggested Citation

von Kalckreuth, Ulf and Murphy, Emma, Financial Constraints and Capacity Adjustment in the United Kingdom: Evidence from a Large Panel of Survey Data (May 2005). Bank of England Working Paper No. 260, Available at SSRN: https://ssrn.com/abstract=824107 or http://dx.doi.org/10.2139/ssrn.824107

Ulf Von Kalckreuth

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Emma Murphy (Contact Author)

Bank of England - Financial Stability Assessment Division ( email )

London
United Kingdom

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