Financial Constraints of Private SMEs in Germany : Measurement and Consequences on Corporate Policies

We examine a large and unique panel containing survey and financial statement data on small and medium sized private enterprises (SMEs) in Germany from 1991 to 2011. From the survey data, we derive a financial constraints measure based on managers' self-perception. We find that our measure identifies firms as financially constrained that one would associate with difficult access to external finance. A comparison of our measure with the Size-Age index recently proposed by Hadlock and Pierce [Review of Financial Studies 23 (2010) 1909] casts doubt on the unlimited use of this index to identify financially constrained firms, at least for private SMEs. By considering firms' financial statement data we additionally analyze the consequences of financial constraints on corporate policies. We use a difference-in-difference estimation approach and observe that firms having turned financially constrained reduce their investment spending and equity, and use more cash compared to firms having remained financially unconstrained