Equity and Debt Financing Constraints
49 Pages Posted: 14 Mar 2011 Last revised: 13 Mar 2015
Date Written: March 8, 2015
Abstract
I construct a structural model in which firms maximize value conditional on being restricted from issuing equity and unsecured debt. Using GMM estimation, I find that a model with both equity and debt constraints fits better than models without constraints or with only one constraint. The estimated financing constraint measures are consistent with financing behavior and firm characteristics believed of constrained firms, with debt being the limiting constraint. Furthermore, equity constrained firms decrease R&D expenses over the next period while debt constrained firms decrease capital expenditure. Finally, I find a positive but insignificant risk premium for debt constraints amounting to 3.0% over one year that does not exist for equity constraints.
Keywords: financial constraints, capital structure, investment, equity, debt
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation
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