Financing constraints revisited : is there a role for taxation and internal funds?

The empirical investment literature provides evidence on financing constraints mostly by estimating investment cash-flow sensitivities for a priori (un-)constrained firms or develops rather ad-hoc indicators to explain firms' differential access to external capital. However, the sources and determinants of financing constraints often remain unclear. Moreover, none of the existing indicators provides a role for taxation in explaining firms' financial constraint status. I fill this gap using a theoretical approach that explains how profit taxes, internal funds and other firm characteristics impact firms' access to external capital and subsequent investment levels. Based on the theoretical findings, I provide empirical evidence from a unique micro dataset of merged survey and financial statement data that allows a direct measurement of firms' credit constraints status and contains a vast set of control variables. Preliminary results point to a significant role of pledgeable income and underline the importance of own funds and expected output for obtaining external finance. Furthermore, a firm's size and age significantly impact its access to external funds. Taxation, by reducing pledgeable income, exerts a positive effect on the probability of being financially restricted. -- Capital Constraints ; Taxation ; Investment ; Cash Flow ; Firm-Level Data ; Survey Data.