UK Evidence on the Effects of Firm-Specific Characteristicson the Capital-Labour ratio under Capital MarketImperfections

This paper contributes to the literature by introducing the nexus between financial constraints and thecapital-labour uptake and by considering the capital-labour ratio to overcome the problems that haveplagued investment literature -regarding the investment-cash flow sensitivity of constrained andunconstrained firms- that have focused only on investment ignoring employment decisions. Theinclusion of the employment along with the capital can provide clear evidence about firms’ decisionson their allocation of funds between capital and labour. To detect any possible variation in our resultsacross firms we use a sample of 17,350 quoted and unquoted UK firms over the period 1994-2004and we estimate it applying panel data techniques. It is shown that balance sheet indicators such asleverage and cash flow result in lower K/L ratio, while the collateral ratio has a positive effect on theK/L ratio. In addition, when we differentiate the effects of the firm-specific characteristics acrossfirms that are more or less financially constrained, we find that the former category exhibits a lowercapital-labour ratio...