Assessing financial constraints at the firm level: a credit rationing approach

We propose two new indicators of the extent of financial constraints forms may face. The first indicator directly stems from the microeconometric rationing model proposed by Kremp and Sevestre (2013). The second indicator partly follows the methodology used by Kaplan-Singales (1997), Hadlock and Pierce (2010) and others. We show that our two indicators behave quite satisfactorily as smaller and younger firms, as well as those with a bad rating from the Banque de France appear to face higher financial constraints. Moreover, the correlations of these two indicators with a number of financial ratios are consistent with what is expected. Interestingly, firms investing more are more constrained, thus confirming the importance of allowing for the demand side when assessing financial constraints. Furthermore, we show that when it comes to predicting firms' own declaration of their financial constraints, our two indicators outperform previously existing indicators.