New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index
ABSTRACT We collect detailed qualitative information from financial filings to categorize financial constraints for a random sample of firms from 1995 to 2004. Using this categorization, we estimate ordered logit models predicting constraints as a function of different quantitative factors. Our findings cast serious doubt on the validity of the KZ index as a measure of financial constraints, while offering mixed evidence on the validity of other common measures of constraints. We find that firm size and age are particularly useful predictors of financial constraint levels, and we propose a measure of financial constraints that is based solely on these firm characteristics. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
- SourceAvailable from: SSRN[Show abstract] [Hide abstract]
ABSTRACT: We study whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control, and their control benefits, survive the crisis, at the expense of outside shareholders.05/2013;
- [Show abstract] [Hide abstract]
ABSTRACT: Despite a large literature on discretionary accruals, how the use of discretionary accruals impacts corporate financial decisions is not well understood. We hypothesize that a financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to make the investments. We examine a large panel of firms during 1987 to 2009 and find that financially constrained firms with good investment opportunities have significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms have higher earnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supporting evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.02/2013;
- [Show abstract] [Hide abstract]
ABSTRACT: We show that financial constraints may benefit innovation by improving the efficiency of innovative activities. We measure firm-level innovative efficiency by patents (or patent citations) scaled by R&D (research and development) investment or the number of employees, and find that financial constraints are positively associated with innovative efficiency. Tests using the 1989 junk bond crisis as an exogenous shock to financial constraints suggest a causal interpretation for the link. Consistent with agency problems, the positive effect of financial constraints on innovative efficiency is stronger among firms with high excess cash holdings and low investment opportunities, and among firms in less competitive industries. Financial constraints appear to mitigate free cash flow problems that induce firms to make unproductive R&D investment in fields out of their direct expertise. Our findings point to a bright side of the role of financial constraints for corporate investment in intangible assets.04/2013;