TY - JOUR

T1 - The evolution of financial constraints

AU - Christodoulou, Demetris

AU - Ho, Shawn

AU - Prokhorov, Artem

N1 - Funding Information: We would like to thank John Doukas, the Editor, as well as two anonymous reviewers for their constructive feedback. We also acknowledge useful comments from Robert Bartels, Greg Clinch, James Ohlson, Guillaume Roger, Rik Sen, Hung‐Jen Wang and Toni Whited. Prokhorov's research for this paper was supported by a grant from the Russian Science Foundation (No.20‐18‐00365). Publisher Copyright: © 2021 John Wiley & Sons Ltd.

PY - 2021/4/1

Y1 - 2021/4/1

N2 - 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.

AB - 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.

KW - capital investment

KW - financial constraints

KW - investment-cash flow sensitivity

KW - stochastic frontier analysis

KW - REGRESSION

KW - CAPITAL-MARKET IMPERFECTIONS

KW - FRONTIER ESTIMATION

KW - BEHAVIOR

KW - CASH FLOW SENSITIVITY

KW - IMPACT

KW - POLICY

KW - INVESTMENT

KW - GROWTH

KW - VARIABLES

UR - http://www.scopus.com/inward/record.url?scp=85107309564&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/ec8b3436-08e8-357b-a403-0ff17a2f52b7/

U2 - 10.1111/eufm.12310

DO - 10.1111/eufm.12310

M3 - Article

AN - SCOPUS:85107309564

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

ER -