Causes and effects of financing constraints at the firm level: Some microeconometric evidence

Asymmetric information between lender and borrower is made responsible for financing constraints at the firm level which may influence real activity. In this paper a standard model of credit rationing due to adverse selection and adverse incentive effects is used to derive hypotheses on causes of financing constraints. Firms' age and size are among the factors which should influence availability of information and hence the probability of financing constraints. Furthermore, changing business prospects might strengthen the degree of informational asymmetry between firms and banks. The main contribution of this paper is an econometric analysis of the derived hypotheses using German firm panel data. Both, hypotheses on the causes of limited access to the loan market and its effects on investment and innovative activities are tested. The estimation is based on microdata of the ifo institute for economic research, Munich. Neither the influence of asymmetric information on financing constraints nor their real effects can be rejected by the data.