A New Measure of Financial Constraints Applicable to Private and Public Firms

We study managers’ self-assessment of their firm’s financial constraint status to assess the validity of commonly used indicators of financial constraints, and to derive a new measure of financial constraints applicable to private and listed firms. Comparing categorizations based on common financial constraints measures with managers’ self-assessment lead to more than 70% false-positive classifications. We therefore derive a new measure of financial constraints which performs well in-sample and out-of-sample for private firms. In addition, the index reliably identifies constrained listed U.S. firms, as measured by the occurrence of liquidity events and the incidence of an inelastic capital supply.