Measuring financial exclusion of firms

Abstract

Financial ratios such as leverage or indices based on firm characteristics (Kaplan–Zingales, Whited–Wu, Hadlock–Pierce) have been used to measure whether a firm has too much debt. Let’s assume a firm does not have any debt. Does this ‘choice’ reflect financial strength or exclusion? To measure the latter, this paper develops a theory to estimate the value of financial constraints. Based on a strictly concave production function, firms that face financial constraints take longer to reach their steady-state. This added time diminishes firm value, which translates into a shadow price of relaxing financial constraints.