Testing financing constraints on firm investment using variable capital

We consider a dynamic multifactor model of investment with financing imperfections, adjustment costs and fixed and variable capital. We use the model to derive a test of financing constraints based on a reduced form variable capital equation. Simulation results show that this test correctly identifies financially constrained firms even when the estimation of firms’ investment opportunities is very noisy. In addition, the test is well specified in the presence of both concave and convex adjustment costs of fixed capital. We confirm empirically the validity of this test on a sample of small Italian manufacturing companies.

• Publication year

  2007

• Venue

  Journal of Financial Economics

• Publication date

  2007-12-01

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.2139/SSRN.1002865
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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