A note on a semiparametric approach to estimating financing constraints in firms

Bhaumik, SK; Kumbhakar, SC; Sun, K

Abstract

In this paper, we present a novel approach to modeling financing constraints of firms. Specifically, we adopt an approach in which firm-level investment is a nonparametric function of some relevant firm characteristics, cash flow in particular. This enables us to generate firm-year specific measures of cash flow sensitivity of investment. We are therefore able to draw conclusions about financing constraints of individual firms as well as cohorts of firms without having to split our sample on an ad hoc basis. This is a significant improvement over the stylized approach that is based on comparison of point estimates of cash flow sensitivity of investment of the average firm of ad hoc sub-samples of firms. We use firm-level data from India to highlight the advantages of our approach. Our results suggest that the estimates generated by this approach are meaningful from an economic point of view and are consistent with the literature.

Citation

Bhaumik, S., Kumbhakar, S., & Sun, K. (2014). A note on a semiparametric approach to estimating financing constraints in firms. European Journal of Finance, 21(12), 992-1004. https://doi.org/10.1080/1351847X.2014.906068

• Journal Article Type: Article
• Acceptance Date: Mar 12, 2014
• Online Publication Date: May 15, 2014
• Publication Date: May 15, 2014
• Deposit Date: May 29, 2015
• Journal: The European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 21
• Issue: 12
• Pages: 992-1004
• DOI: https://doi.org/10.1080/1351847X.2014.906068
• Publisher URL: http://dx.doi.org/10.1080/1351847X.2014.906068
• Related Public URLs: http://www.tandfonline.com/toc/rejf20/current