Journal Article

Investment-cash flow sensitivities, credit rationing and financing constraints in small and medium-sized firms

Becchetti, Leonardo, Castelli, Annalisa, Hasan, Iftekhar

2010

Overview

The controversy on whether investmentcash flow sensitivity is a good indicator of financing constraints is still unsolved. We apply a comprehensive approach by cross-validating our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing constraints on a sample of mainly small and medium-sized firms. Our qualitative information shows that (self-declared) credit rationing is (weakly) related to both traditional a priori factors—such as firm size, age and location—and lenders' rational decisions taken on the basis of their credit risk models. We use the qualitative information on firms which were denied (additional) credit to provide evidence relevant to the investmentcash flow sensitivity debate. The evidence shows that self-declared credit rationing significantly discriminates between firms which possess or not such sensitivity, while a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment-cash flow sensitivity), supporting the more recent empirical evidence in this direction.

• Publisher: Springer,Springer US,Springer Nature B.V
• Subject: Balance sheets / Bank credit / Bank loans / Business and Management / Business management / Cash flow / Companies / Constraints / Corporate finance / Credit / Credit rationing / Credit risk / Credit systems / Debt / Decision making / Discriminant analysis / Entrepreneurship / Financial investments / Financing / Financing methods / Hypotheses / Industrial Organization / Investment / Investment credit / Investments / Lenders / Lines of credit / Management / Microeconomics / R&D / Rationing / Research & development / Small & medium sized enterprises-SME / Small and medium sized enterprises / Studies