Financial constraints and investment in France and Spain : a comparison using firm level data

Abstract

This paper analyses corporate investment decisions in France and Spain, focusing on the role of financial constraints in explaining investment behaviour. For this purpose, we take advantage of very carefully harmonised data sets that allow for the use of variables homogeneously defined in both countries. The information used consists of two panel data sets of industry firms selected from those reporting information to the Central Balance Sheet Offices of the Banque de France and of the Banco de España over the period 1991-1999. So as to test for the existence of liquidity constraints, we conduct a test of excess sensitivity of investment to cash flow using a standard Euler equation model. More precisely, both the theoretical model and the testing strategy used in this paper closely follow Bond and Meghir (1994). These authors present an empirical model of investment based on the Euler equation of an extended version of the standard neoclassical model of investment. This model assumes that the firm faces a hierarchy of costs for the alternative sources of finance and leads to different characterisations of investment behaviour for firms pursuing different financial policies. Overall, our results suggest that there are significant differences in investment behaviour which are closely linked to the financial situation of firms. In particular, the evidence found is consistent with the investment expenditure of firms paying zero dividends being constrained by the availability of internally generated funds