Investment-cash flow sensitivity and financial constraints: Evidence from unquoted European SMEs

Klaas Mulier, Koen Schoors and Bruno Merlevede

Journal of Banking & Finance, 2016, vol. 73, issue C, 182-197

Abstract: We contribute to the financial constraints literature and the investment-cash flow sensitivity debate by defining a new and simple index of firm level financial constraints for unquoted European SMEs. Firms that are constrained according to our index pay higher interest rates on their debt. An exogenous financial supply shock reveals that our index also captures financial constraints in terms of the volume of credit. Our index outperforms existing indices in capturing financial constraints of unquoted SMEs. Finally, employing our proposed index to identify financially constrained firms and using firm-level employment growth as a control for investment opportunities, we find that constrained firms display the highest investment-cash flow sensitivities.

Keywords: Investment-cash flow sensitivity; Cost of finance; Financial constraints index (search for similar items in EconPapers)
JEL-codes: D92 E22 G31 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:73:y:2016:i:c:p:182-197

DOI: 10.1016/j.jbankfin.2016.09.002

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