Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148151
Authors: 
Cao, Shutao
Leung, Danny
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-44
Abstract: 
The degree to which financial constraint is binding is often not directly observable in commonly used business data sets (e.g., Compustat). In this paper, we measure and estimate the likelihood of a firm being constrained by external financing using a data set of small- and medium-sized Canadian firms. Our measure separates the need for financing from the degree of constraint, conditional on the need for financing. We find that firm size, the current-debt-to-asset ratio and cash flow are robust indicators that can be used as a proxy for financial constraint. The total debt-to-asset ratio is not, however, a statistically significant indicator of financial constraint. In addition, firms with higher cash flow are less likely to need external financing and to be constrained if they do need it. We then estimate firm-level total factor productivity by taking into account the measured likelihood of binding financial constraint. Estimates of the coefficients for labour and capital in the structural estimation of the production function can be downward-biased if financial constraint is omitted, because production inputs are negatively correlated with the likelihood of being constrained by external financing. This in turn leads to an upward bias of total factor productivity estimates, which is about 4 per cent according to our estimation.
Subjects: 
Firm dynamics
Productivity
JEL: 
D24
G32
L25
Document Type: 
Working Paper

Files in This Item:
File
Size
496.59 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.