Financing Constraints Revisited - Is there a Role for Taxation and Internal Funds?

The empirical investment literature provides evidence on financing constraints mostly by estimating cash-flow sensitivities for a priori (un-)constrained firms or develops rather ad-hoc indicators to explain firms' differential access to external capital. However, the sources and determinants of financing constraints often remain unclear. Furthermore, none of the indicators suggested so far provides a role for taxation in explaining firms' credit supply. We fill this gap using recently developed theoretical approaches that explain how profit taxes and internal funds impact firms' access to external capital and subsequent investment levels. Based on the theoretical variables expected to matter for a firm's access to credit, we provide empirical evidence using a unique micro dataset of merged survey and financial statement data provided by the Ifo Institute in Munich. In contrast to previous studies, we measure firms' credit constraints directly and use a broad set of balance sheet and qualitative parameters as controls. Preliminary results point to a significant role of pledgeable income and underline the importance of own funds and expected output for obtaining external finance. Furthermore, a firm s size and age have a significant impact on firms' access to external funds. The results are robust to various specifications and confirm previous results. Taxation, by reducing pledgeable income, is found to exert a positive effect on the probability of being financially restricted.