The evolution of financial constraints. (1st June 2021)

• Record Type: Journal Article
• Authors: Christodoulou, Demetris; Ho, Shawn; Prokhorov, Artem
• Is Part Of: European financial management. Volume 28:Number 1(2022)
• Page Start: 233
• Page End: 259
• Publication Date: 2021-06-01
• Subjects: capital investment -- financial constraints -- investment‐cash flow sensitivity -- stochastic frontier analysis; Finance -- European Union countries -- Periodicals; International finance -- Periodicals; Corporations -- European Union countries -- Finance -- Periodicals; 332.094
• DOI: 10.1111/eufm.12310
• Languages: English
• ISSNs: 1354-7798

Abstract

Abstract: We demonstrate that the severity of financial constraints has declined over time for two reasons: (i) improved access to external funds as evidenced by a decreased reliance on internal cash flows, and (ii) an inward shifting investment frontier with reduced investment opportunities. The decline in financial constraints coincides with the documented diminishing sensitivity of investment to cash flows, yet we show that cash flows remain a determining factor in helping constrained firms overcome restricted access to external capital. There is a flight‐to‐quality during economic shocks, where the adverse effects following periods of tightened credit are particularly pronounced for smaller firms, with larger firms appearing largely unaffected.