The Sources of Financing Constraints

The Sources of Financing Constraints

Boris Nikolov, Lukas Schmid, Roberto Steri

Series number :

Serial Number: 
641/2019

Date posted :

November 22 2019

Last revised :

December 04 2019
SSRN Share

Keywords

  • financing constraints • 
  • financial frictions • 
  • moral hazard • 
  • limited enforcement • 
  • trade-off • 
  • dynamic contracting • 
  • agency • 
  • structural estimation • 
  • empirical policy function estimation

In order to identify the relevant sources of firms' financing constraints, we ask what financial frictions matter for corporate policies.

To that end, we build, solve, and estimate a range of dynamic models of corporate investment and financing, embedding a host of financial frictions. We focus on limited enforcement, moral hazard, and trade-off models. All models share a common technology, but differ in the friction generating financing constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model or model combination performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor trade-off models for larger Compustat firms, limited commitment models for smaller firms, and moral hazard models for private firms. Our estimates point to significant financing constraints due to agency frictions and highlight the importance of identifying their relevant sources for firm valuation.

Authors

Real name:
Lukas Schmid
Real name:
Roberto Steri