Financing Constraints and Industry Classification : Evidence from Omani Firm Level Data

Oman is an oil-rich nation but many firms in the country show clear evidence of financial constraints. This is paradoxical because the country has large oil surpluses, and banks, financial institutions, and other institutional investors in the country are flush with funds. Financial constraint is a well-researched topic and a large number of empirical research papers have been published on the topic of financing constraints. Previous researchers have classified firms into discrete categories of financial constraint and relate these classifications to accounting variables. This study uses the famous KZ index and the methodology suggested by Kaplan and Zingales to look at the firm level data of Omani companies. The KZ Index serves as an indicator of the level of financial constraint under which a firm is operating, and the higher the index, the more constrained is the firm financially. All the active companies listed on the Muscat Securities Market were considered for the purpose of the study. Data related to three years - 2003, 2004, and 2005 - was used for the purpose of the study. The study shows that a majority of the firms in some industry groups are financially constrained. Macro level bank credit data also indicates a decline in credit to some industry groups. The study argues that financial constraints depend on the industry group to which a firm belongs, because bank lending practices depend on the nature of the business and the type of the security available