The Sources of Financing Constraints

Which financial frictions drive firms' financing constraints? We structurally estimate dynamic firm financing models embedding many financial frictions, on panels of public firms and private firms. We focus on limited enforcement, moral hazard, and trade-off models and assess which models rationalize best observed corporate policies across various samples. Our tests, based on empirical policy function benchmarks, favor trade-off models for larger public firms, limited commitment models for smaller public firms, and moral hazard models for Private firms. Our estimates suggest significant financing constraints due to agency frictions and highlight the importance of identifying their sources for firm valuation. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

The study structurally estimates dynamic firm financing models, finding that trade-off models, limited commitment models, and moral hazard models explain observed corporate policies better for different sizes and natures of companies. Significant financing constraints are identified due to agency frictions, underscoring the importance of identifying their sources for firm valuation.