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Identifying financial constraints

Author

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  • Ferrando, Annalisa
  • Mulier, Klaas
  • Verschelde, Marijn
  • Cherchye, Laurens
  • De Rock, Bram

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. JEL Classification: E44, G00, G30, G32

Suggested Citation

  • Ferrando, Annalisa & Mulier, Klaas & Verschelde, Marijn & Cherchye, Laurens & De Rock, Bram, 2020. "Identifying financial constraints," Working Paper Series 2420, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202420
    Note: 235236
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    References listed on IDEAS

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    More about this item

    Keywords

    access to finance; financial constraints; identification; indicators; production function;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G00 - Financial Economics - - General - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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