Investment efficiency among a cross-section of UK firms: implications for the debate on financing constraints

Sumon Bhaumik, Karen Bonner, Mark Hart

Research output: Working paper

Abstract

In this paper, we address this policy issue using a stylised methodology that relies on estimates of the cash flow sensitivity of firms’ investment, as well as a relatively new methodology that enables us to generate a (0, 1) bounded measure of investment efficiency of firms, i.e., the efficiency with which firms can convert their sales into investment, after controlling for unobserved year- and industry-specific effects. Higher investment efficiency is associated with lower financing constraint. Our results indicate that there is considerable heterogeneity in investment efficiency across firms, during a given year; the range being 0.57-0.82. However, the average investment efficiency measure is similar across years, regions and NACE 2-digit industries. We also do not find discernible patterns in the relationship between investment efficiency and firm size, both before and during the financial crisis. The results suggest that while some firms are clearly less efficient at translating their performance into investment, broad policies targeting firms of a certain size, or those within a particular industry or region, may not successfully address the problem of financing constraint in the United Kingdom. The targeting of firms with financing constraints may have to be considerably more refined, and look at not easily observable factors such as credit history/events and organisational capacity of the firms.
LanguageEnglish
PublisherNational Endowment for Science, Technology and the Arts (NESTA)
Publication statusPublished - Oct 2012

Publication series

NameWorking paper series
PublisherNESTA
No.12/11
ISSN (Print)2050-9820

Fingerprint

Financing constraints
Cross section
Investment efficiency
Industry
Methodology
Targeting
Event history
Financial crisis
Credit
Efficiency measures
Firm size
Cash flow
Factors
Organizational capacity
Investment performance
Firm investment

Bibliographical note

© 2012 by the author(s). Short sections of text, tables and figures may be reproduced without explicit permission provided that full credit is given to the source. The views expressed in this working paper are those of the author(s) and do not necessarily represent those of Nesta.

Cite this

Bhaumik, S., Bonner, K., & Hart, M. (2012). Investment efficiency among a cross-section of UK firms: implications for the debate on financing constraints. (Working paper series; No. 12/11). National Endowment for Science, Technology and the Arts (NESTA).
Bhaumik, Sumon ; Bonner, Karen ; Hart, Mark. / Investment efficiency among a cross-section of UK firms : implications for the debate on financing constraints. National Endowment for Science, Technology and the Arts (NESTA), 2012. (Working paper series; 12/11).
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Bhaumik, S, Bonner, K & Hart, M 2012 'Investment efficiency among a cross-section of UK firms: implications for the debate on financing constraints' Working paper series, no. 12/11, National Endowment for Science, Technology and the Arts (NESTA).

Investment efficiency among a cross-section of UK firms : implications for the debate on financing constraints. / Bhaumik, Sumon; Bonner, Karen; Hart, Mark.

National Endowment for Science, Technology and the Arts (NESTA), 2012. (Working paper series; No. 12/11).

Research output: Working paper

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AU - Hart, Mark

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PY - 2012/10

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Bhaumik S, Bonner K, Hart M. Investment efficiency among a cross-section of UK firms: implications for the debate on financing constraints. National Endowment for Science, Technology and the Arts (NESTA). 2012 Oct. (Working paper series; 12/11).