A note on a semiparametric approach to estimating financing constraints in firms

Sumon K. Bhaumik, Subal C. Kumbhakar*, Kai Sun

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


In this paper, we present a novel approach to modeling financing constraints of firms. Specifically, we adopt an approach in which firm-level investment is a nonparametric function of some relevant firm characteristics, cash flow in particular. This enables us to generate firm-year specific measures of cash flow sensitivity of investment. We are therefore able to draw conclusions about financing constraints of individual firms as well as cohorts of firms without having to split our sample on an ad hoc basis. This is a significant improvement over the stylized approach that is based on comparison of point estimates of cash flow sensitivity of investment of the average firm of ad hoc sub-samples of firms. We use firm-level data from India to highlight the advantages of our approach. Our results suggest that the estimates generated by this approach are meaningful from an economic point of view and are consistent with the literature.
Original languageEnglish
Pages (from-to)992-1004
Number of pages13
JournalEuropean Journal of Finance
Issue number12
Early online date15 May 2014
Publication statusPublished - 2015


  • financial constraint
  • semiparametric approach
  • Robinson model


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