Financial Constraints, Working Capital and the Dynamic Behavior of the Firm
Financial constraints are widespread in developing countries, where even short-term credit is limited. Finance held by firms as working capital is a substantial proportion of sales revenue, yet the role of working capital is largely neglected by ex...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/03/19190163/financial-constraints-working-capital-dynamic-behavior-firm http://hdl.handle.net/10986/17300 |
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okr-10986-17300 |
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| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCELERATOR ACCESS TO CREDIT ACCESS TO EXTERNAL FINANCE ACCESS TO FINANCE ACCESS TO FINANCING ACCOUNTING ACCOUNTS RECEIVABLE AFFILIATED ORGANIZATIONS AGENCY COSTS AMOUNT OF CAPITAL AVAILABILITY OF CREDIT BANK LOAN BANKING SECTOR BANKING SECTOR ASSETS BASE YEAR BINDING CONSTRAINTS BOND BONDS BORROWING BORROWING REQUIREMENTS BUDGET CONSTRAINT BUSINESS CYCLE BUSINESS CYCLES CAPITAL ACCOUNTS CAPITAL ACCUMULATION CAPITAL ASSETS CAPITAL CONSTRAINTS CAPITAL INFLOWS CAPITAL INVESTMENT CAPITAL MARKETS CAPITAL RATIO CAPITAL RATIOS CAPITAL REQUIREMENTS CAPITAL STOCK CASH FLOW CASH ON HAND COLLATERAL COMMERCIAL BANKS CONSUMER SURPLUS CONTRACT ENFORCEMENT CORPORATE INVESTMENT CORRUPTION COST OF CAPITAL COST OF FINANCE COST OF FUNDS CREDIT AVAILABILITY CREDIT CONSTRAINED FIRM CREDIT CONSTRAINTS CREDIT MARKET CREDIT RATIONING DEBT DECISION MAKING DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMIES DEVELOPMENT POLICY DISINVESTMENT DIVIDEND DIVIDEND PAYMENT DURABLE ECONOMETRICS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC IMPLICATIONS ECONOMIC RESEARCH EMERGING ECONOMIES ENFORCEMENT MECHANISMS ENTERPRISE DEVELOPMENT ENTREPRENEURS EQUATIONS EQUIPMENT EXPECTED RETURNS EXTERNAL FINANCE FACTOR DEMAND FACTORS OF PRODUCTION FARMER FINANCE ACCESS FINANCE CONSTRAINTS FINANCES FINANCIAL CONSTRAINT FINANCIAL CONSTRAINTS FINANCIAL DEVELOPMENT FINANCIAL FACTORS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARY FINANCIAL MARKETS FINANCIAL NEEDS FINANCIAL POLICY FINANCIAL RESOURCES FINANCIAL SECTOR FIRM GROWTH FIXED INPUTS FIXED INVESTMENT FOREIGN BANKS FOREIGN DIRECT INVESTMENT FOREIGN INFLOWS FOREIGN TRADE GDP GROWTH RATE HIGH INTEREST RATES HOLDING HOLDINGS ID INCOME INCOME EFFECT INEFFICIENCY INSTRUMENT INTEREST RATE INTEREST RATE SHOCKS INTEREST RATES INTERNAL FINANCE INTERNAL FUNDS INTERNATIONAL BANK INVENTORIES INVENTORY INVESTMENT BEHAVIOR INVESTMENT CLIMATE INVESTMENT CLIMATE ASSESSMENT INVESTMENT OPPORTUNITIES INVESTMENT SPENDING INVESTMENT-CASH FLOW SENSITIVITIES LIMITED ACCESS LIQUID ASSET LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS MACROECONOMICS MANUFACTURING INDUSTRIES MARGINAL COST MARGINAL PRODUCT MARGINAL VALUE MARKET CAPITALIZATION MARKET INTEREST MARKET INTEREST RATES MARKET PRICE MATURITY MICROENTERPRISES NEGATIVE SHOCK NEGATIVE SHOCKS NET WORTH OPPORTUNITY COST OPTIMIZATION PERMANENT SHOCKS PHYSICAL CAPITAL PREPAYMENT PRICE CHANGES PRICE INCREASES PRICE TAKERS PRIVATE INVESTMENT PRIVATE SECTOR DEVELOPMENT PRODUCTION EFFICIENCY PRODUCTION FUNCTION PRODUCTION INPUTS PROFIT MAXIMIZING PROFIT OPPORTUNITY RATE OF GROWTH REAL INTEREST REAL INTEREST RATE RECEIPT RECEIPTS RETURN SALES REVENUE SAVINGS SECONDARY MARKETS SHORT TERM DEBT SOURCES OF FINANCE STOCK EXCHANGES SUBSTITUTION EFFECT SUPPLY SHOCKS TERM CREDIT TERMS OF CAPITAL TRADE CREDIT TRADE LIBERALIZATION TURNOVER VALUE OF OUTPUT VOLATILE ENVIRONMENTS VOLATILITY WAGES WEALTH WORKING CAPITAL |
| spellingShingle |
ACCELERATOR ACCESS TO CREDIT ACCESS TO EXTERNAL FINANCE ACCESS TO FINANCE ACCESS TO FINANCING ACCOUNTING ACCOUNTS RECEIVABLE AFFILIATED ORGANIZATIONS AGENCY COSTS AMOUNT OF CAPITAL AVAILABILITY OF CREDIT BANK LOAN BANKING SECTOR BANKING SECTOR ASSETS BASE YEAR BINDING CONSTRAINTS BOND BONDS BORROWING BORROWING REQUIREMENTS BUDGET CONSTRAINT BUSINESS CYCLE BUSINESS CYCLES CAPITAL ACCOUNTS CAPITAL ACCUMULATION CAPITAL ASSETS CAPITAL CONSTRAINTS CAPITAL INFLOWS CAPITAL INVESTMENT CAPITAL MARKETS CAPITAL RATIO CAPITAL RATIOS CAPITAL REQUIREMENTS CAPITAL STOCK CASH FLOW CASH ON HAND COLLATERAL COMMERCIAL BANKS CONSUMER SURPLUS CONTRACT ENFORCEMENT CORPORATE INVESTMENT CORRUPTION COST OF CAPITAL COST OF FINANCE COST OF FUNDS CREDIT AVAILABILITY CREDIT CONSTRAINED FIRM CREDIT CONSTRAINTS CREDIT MARKET CREDIT RATIONING DEBT DECISION MAKING DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMIES DEVELOPMENT POLICY DISINVESTMENT DIVIDEND DIVIDEND PAYMENT DURABLE ECONOMETRICS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC IMPLICATIONS ECONOMIC RESEARCH EMERGING ECONOMIES ENFORCEMENT MECHANISMS ENTERPRISE DEVELOPMENT ENTREPRENEURS EQUATIONS EQUIPMENT EXPECTED RETURNS EXTERNAL FINANCE FACTOR DEMAND FACTORS OF PRODUCTION FARMER FINANCE ACCESS FINANCE CONSTRAINTS FINANCES FINANCIAL CONSTRAINT FINANCIAL CONSTRAINTS FINANCIAL DEVELOPMENT FINANCIAL FACTORS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARY FINANCIAL MARKETS FINANCIAL NEEDS FINANCIAL POLICY FINANCIAL RESOURCES FINANCIAL SECTOR FIRM GROWTH FIXED INPUTS FIXED INVESTMENT FOREIGN BANKS FOREIGN DIRECT INVESTMENT FOREIGN INFLOWS FOREIGN TRADE GDP GROWTH RATE HIGH INTEREST RATES HOLDING HOLDINGS ID INCOME INCOME EFFECT INEFFICIENCY INSTRUMENT INTEREST RATE INTEREST RATE SHOCKS INTEREST RATES INTERNAL FINANCE INTERNAL FUNDS INTERNATIONAL BANK INVENTORIES INVENTORY INVESTMENT BEHAVIOR INVESTMENT CLIMATE INVESTMENT CLIMATE ASSESSMENT INVESTMENT OPPORTUNITIES INVESTMENT SPENDING INVESTMENT-CASH FLOW SENSITIVITIES LIMITED ACCESS LIQUID ASSET LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS MACROECONOMICS MANUFACTURING INDUSTRIES MARGINAL COST MARGINAL PRODUCT MARGINAL VALUE MARKET CAPITALIZATION MARKET INTEREST MARKET INTEREST RATES MARKET PRICE MATURITY MICROENTERPRISES NEGATIVE SHOCK NEGATIVE SHOCKS NET WORTH OPPORTUNITY COST OPTIMIZATION PERMANENT SHOCKS PHYSICAL CAPITAL PREPAYMENT PRICE CHANGES PRICE INCREASES PRICE TAKERS PRIVATE INVESTMENT PRIVATE SECTOR DEVELOPMENT PRODUCTION EFFICIENCY PRODUCTION FUNCTION PRODUCTION INPUTS PROFIT MAXIMIZING PROFIT OPPORTUNITY RATE OF GROWTH REAL INTEREST REAL INTEREST RATE RECEIPT RECEIPTS RETURN SALES REVENUE SAVINGS SECONDARY MARKETS SHORT TERM DEBT SOURCES OF FINANCE STOCK EXCHANGES SUBSTITUTION EFFECT SUPPLY SHOCKS TERM CREDIT TERMS OF CAPITAL TRADE CREDIT TRADE LIBERALIZATION TURNOVER VALUE OF OUTPUT VOLATILE ENVIRONMENTS VOLATILITY WAGES WEALTH WORKING CAPITAL Chan, Rosanna Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| geographic_facet |
South Asia Bangladesh |
| relation |
Policy Research Working Paper;No. 6797 |
| description |
Financial constraints are widespread in
developing countries, where even short-term credit is
limited. Finance held by firms as working capital is a
substantial proportion of sales revenue, yet the role of
working capital is largely neglected by existing models of
financial constraints. This paper presents a dynamic model
of the firm that incorporates working capital by introducing
a delay between factor payments and the receipt of revenue.
In contrast with previous models, the working capital model
predicts that firms under binding constraints will
substitute between labor and capital in response to demand
shocks, causing investment to be countercyclical. For firms
near the margin of being constrained, constraints bind when
positive production opportunities arise. Output growth is
therefore constrained in response to positive shocks but not
to negative shocks. Simulations suggest that models without
working capital may understate the predicted effects of
financial constraints on production efficiency, firm profit
and growth over time. The predictions are tested with the
Bangladesh Panel Survey data for manufacturing firms.
Consistent with the theory, there is evidence that
constraints bind when output price increases, that
investment by constrained firms is countercyclical, and that
output response to positive shocks is dampened for firms
that are sometimes constrained. The results also are
important for policy. In order to maximize growth, efforts
to relieve credit constraints should be focused on periods
when demand shocks are high. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Chan, Rosanna |
| author_facet |
Chan, Rosanna |
| author_sort |
Chan, Rosanna |
| title |
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| title_short |
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| title_full |
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| title_fullStr |
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| title_full_unstemmed |
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm |
| title_sort |
financial constraints, working capital and the dynamic behavior of the firm |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2014/03/19190163/financial-constraints-working-capital-dynamic-behavior-firm http://hdl.handle.net/10986/17300 |
| _version_ |
1764436839983218688 |
| spelling |
okr-10986-173002021-04-23T14:03:37Z Financial Constraints, Working Capital and the Dynamic Behavior of the Firm Chan, Rosanna ACCELERATOR ACCESS TO CREDIT ACCESS TO EXTERNAL FINANCE ACCESS TO FINANCE ACCESS TO FINANCING ACCOUNTING ACCOUNTS RECEIVABLE AFFILIATED ORGANIZATIONS AGENCY COSTS AMOUNT OF CAPITAL AVAILABILITY OF CREDIT BANK LOAN BANKING SECTOR BANKING SECTOR ASSETS BASE YEAR BINDING CONSTRAINTS BOND BONDS BORROWING BORROWING REQUIREMENTS BUDGET CONSTRAINT BUSINESS CYCLE BUSINESS CYCLES CAPITAL ACCOUNTS CAPITAL ACCUMULATION CAPITAL ASSETS CAPITAL CONSTRAINTS CAPITAL INFLOWS CAPITAL INVESTMENT CAPITAL MARKETS CAPITAL RATIO CAPITAL RATIOS CAPITAL REQUIREMENTS CAPITAL STOCK CASH FLOW CASH ON HAND COLLATERAL COMMERCIAL BANKS CONSUMER SURPLUS CONTRACT ENFORCEMENT CORPORATE INVESTMENT CORRUPTION COST OF CAPITAL COST OF FINANCE COST OF FUNDS CREDIT AVAILABILITY CREDIT CONSTRAINED FIRM CREDIT CONSTRAINTS CREDIT MARKET CREDIT RATIONING DEBT DECISION MAKING DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMIES DEVELOPMENT POLICY DISINVESTMENT DIVIDEND DIVIDEND PAYMENT DURABLE ECONOMETRICS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC IMPLICATIONS ECONOMIC RESEARCH EMERGING ECONOMIES ENFORCEMENT MECHANISMS ENTERPRISE DEVELOPMENT ENTREPRENEURS EQUATIONS EQUIPMENT EXPECTED RETURNS EXTERNAL FINANCE FACTOR DEMAND FACTORS OF PRODUCTION FARMER FINANCE ACCESS FINANCE CONSTRAINTS FINANCES FINANCIAL CONSTRAINT FINANCIAL CONSTRAINTS FINANCIAL DEVELOPMENT FINANCIAL FACTORS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARY FINANCIAL MARKETS FINANCIAL NEEDS FINANCIAL POLICY FINANCIAL RESOURCES FINANCIAL SECTOR FIRM GROWTH FIXED INPUTS FIXED INVESTMENT FOREIGN BANKS FOREIGN DIRECT INVESTMENT FOREIGN INFLOWS FOREIGN TRADE GDP GROWTH RATE HIGH INTEREST RATES HOLDING HOLDINGS ID INCOME INCOME EFFECT INEFFICIENCY INSTRUMENT INTEREST RATE INTEREST RATE SHOCKS INTEREST RATES INTERNAL FINANCE INTERNAL FUNDS INTERNATIONAL BANK INVENTORIES INVENTORY INVESTMENT BEHAVIOR INVESTMENT CLIMATE INVESTMENT CLIMATE ASSESSMENT INVESTMENT OPPORTUNITIES INVESTMENT SPENDING INVESTMENT-CASH FLOW SENSITIVITIES LIMITED ACCESS LIQUID ASSET LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS MACROECONOMICS MANUFACTURING INDUSTRIES MARGINAL COST MARGINAL PRODUCT MARGINAL VALUE MARKET CAPITALIZATION MARKET INTEREST MARKET INTEREST RATES MARKET PRICE MATURITY MICROENTERPRISES NEGATIVE SHOCK NEGATIVE SHOCKS NET WORTH OPPORTUNITY COST OPTIMIZATION PERMANENT SHOCKS PHYSICAL CAPITAL PREPAYMENT PRICE CHANGES PRICE INCREASES PRICE TAKERS PRIVATE INVESTMENT PRIVATE SECTOR DEVELOPMENT PRODUCTION EFFICIENCY PRODUCTION FUNCTION PRODUCTION INPUTS PROFIT MAXIMIZING PROFIT OPPORTUNITY RATE OF GROWTH REAL INTEREST REAL INTEREST RATE RECEIPT RECEIPTS RETURN SALES REVENUE SAVINGS SECONDARY MARKETS SHORT TERM DEBT SOURCES OF FINANCE STOCK EXCHANGES SUBSTITUTION EFFECT SUPPLY SHOCKS TERM CREDIT TERMS OF CAPITAL TRADE CREDIT TRADE LIBERALIZATION TURNOVER VALUE OF OUTPUT VOLATILE ENVIRONMENTS VOLATILITY WAGES WEALTH WORKING CAPITAL Financial constraints are widespread in developing countries, where even short-term credit is limited. Finance held by firms as working capital is a substantial proportion of sales revenue, yet the role of working capital is largely neglected by existing models of financial constraints. This paper presents a dynamic model of the firm that incorporates working capital by introducing a delay between factor payments and the receipt of revenue. In contrast with previous models, the working capital model predicts that firms under binding constraints will substitute between labor and capital in response to demand shocks, causing investment to be countercyclical. For firms near the margin of being constrained, constraints bind when positive production opportunities arise. Output growth is therefore constrained in response to positive shocks but not to negative shocks. Simulations suggest that models without working capital may understate the predicted effects of financial constraints on production efficiency, firm profit and growth over time. The predictions are tested with the Bangladesh Panel Survey data for manufacturing firms. Consistent with the theory, there is evidence that constraints bind when output price increases, that investment by constrained firms is countercyclical, and that output response to positive shocks is dampened for firms that are sometimes constrained. The results also are important for policy. In order to maximize growth, efforts to relieve credit constraints should be focused on periods when demand shocks are high. 2014-03-18T19:43:46Z 2014-03-18T19:43:46Z 2014-03 http://documents.worldbank.org/curated/en/2014/03/19190163/financial-constraints-working-capital-dynamic-behavior-firm http://hdl.handle.net/10986/17300 English en_US Policy Research Working Paper;No. 6797 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research South Asia Bangladesh |