BANK LENDING, FINANCING CONSTRAINTS AND SME INVESTMENT

BANK LENDING, FINANCING CONSTRAINTS AND SME INVESTMENT Santiago Carbó-Valverde* University of Granada and Federal Reserve Bank of Chicago [email protected] /* */ Francisco Rodríguez-Fernández University of Granada [email protected] /* */ Gregory F. Udell Indiana University [email protected] /* */ Abstract: SME investment opportunities depend on the level of financing constraints that firms face. Earlier research has mainly focused on the controversial argument that cash flow-investment correlations increase with the level of these constraints. We focus on bank loans rather than cash flow. Our results show that investment is sensitive to bank loans for unconstrained firms but not for constrained firms, and trade credit predicts investment, but only for constrained firms. We also find that unconstrained firms use bank loans to finance trade credit provided to other firms. Our results illustrate alternative mechanisms that firms employ both as borrowers and lenders (100 words). Keywords: SMEs, financing constraints, bank lending, trade credit, predictability. WP 2008-04

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