Publication:
Financial Constraints, Working Capital and the Dynamic Behavior of the Firm

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dc.contributor.authorChan, Rosanna
dc.date.accessioned2014-03-18T19:43:46Z
dc.date.available2014-03-18T19:43:46Z
dc.date.issued2014-03
dc.description.abstractFinancial constraints are widespread in developing countries, where even short-term credit is limited. Finance held by firms as working capital is a substantial proportion of sales revenue, yet the role of working capital is largely neglected by existing models of financial constraints. This paper presents a dynamic model of the firm that incorporates working capital by introducing a delay between factor payments and the receipt of revenue. In contrast with previous models, the working capital model predicts that firms under binding constraints will substitute between labor and capital in response to demand shocks, causing investment to be countercyclical. For firms near the margin of being constrained, constraints bind when positive production opportunities arise. Output growth is therefore constrained in response to positive shocks but not to negative shocks. Simulations suggest that models without working capital may understate the predicted effects of financial constraints on production efficiency, firm profit and growth over time. The predictions are tested with the Bangladesh Panel Survey data for manufacturing firms. Consistent with the theory, there is evidence that constraints bind when output price increases, that investment by constrained firms is countercyclical, and that output response to positive shocks is dampened for firms that are sometimes constrained. The results also are important for policy. In order to maximize growth, efforts to relieve credit constraints should be focused on periods when demand shocks are high.en
dc.identifierhttp://documents.worldbank.org/curated/en/2014/03/19190163/financial-constraints-working-capital-dynamic-behavior-firm
dc.identifier.doi10.1596/1813-9450-6797
dc.identifier.urihttps://hdl.handle.net/10986/17300
dc.languageEnglish
dc.language.isoen_US
dc.publisherWorld Bank, Washington, DC
dc.relation.ispartofseriesPolicy Research Working Paper;No. 6797
dc.rightsCC BY 3.0 IGO
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo/
dc.subjectACCELERATOR
dc.subjectACCESS TO CREDIT
dc.subjectACCESS TO EXTERNAL FINANCE
dc.subjectACCESS TO FINANCE
dc.subjectACCESS TO FINANCING
dc.subjectACCOUNTING
dc.subjectACCOUNTS RECEIVABLE
dc.subjectAFFILIATED ORGANIZATIONS
dc.subjectAGENCY COSTS
dc.subjectAMOUNT OF CAPITAL
dc.subjectAVAILABILITY OF CREDIT
dc.subjectBANK LOAN
dc.subjectBANKING SECTOR
dc.subjectBANKING SECTOR ASSETS
dc.subjectBASE YEAR
dc.subjectBINDING CONSTRAINTS
dc.subjectBOND
dc.subjectBONDS
dc.subjectBORROWING
dc.subjectBORROWING REQUIREMENTS
dc.subjectBUDGET CONSTRAINT
dc.subjectBUSINESS CYCLE
dc.subjectBUSINESS CYCLES
dc.subjectCAPITAL ACCOUNTS
dc.subjectCAPITAL ACCUMULATION
dc.subjectCAPITAL ASSETS
dc.subjectCAPITAL CONSTRAINTS
dc.subjectCAPITAL INFLOWS
dc.subjectCAPITAL INVESTMENT
dc.subjectCAPITAL MARKETS
dc.subjectCAPITAL RATIO
dc.subjectCAPITAL RATIOS
dc.subjectCAPITAL REQUIREMENTS
dc.subjectCAPITAL STOCK
dc.subjectCASH FLOW
dc.subjectCASH ON HAND
dc.subjectCOLLATERAL
dc.subjectCOMMERCIAL BANKS
dc.subjectCONSUMER SURPLUS
dc.subjectCONTRACT ENFORCEMENT
dc.subjectCORPORATE INVESTMENT
dc.subjectCORRUPTION
dc.subjectCOST OF CAPITAL
dc.subjectCOST OF FINANCE
dc.subjectCOST OF FUNDS
dc.subjectCREDIT AVAILABILITY
dc.subjectCREDIT CONSTRAINED FIRM
dc.subjectCREDIT CONSTRAINTS
dc.subjectCREDIT MARKET
dc.subjectCREDIT RATIONING
dc.subjectDEBT
dc.subjectDECISION MAKING
dc.subjectDEVELOPING COUNTRIES
dc.subjectDEVELOPING COUNTRY
dc.subjectDEVELOPING ECONOMIES
dc.subjectDEVELOPMENT POLICY
dc.subjectDISINVESTMENT
dc.subjectDIVIDEND
dc.subjectDIVIDEND PAYMENT
dc.subjectDURABLE
dc.subjectECONOMETRICS
dc.subjectECONOMIC ACTIVITY
dc.subjectECONOMIC DEVELOPMENT
dc.subjectECONOMIC GROWTH
dc.subjectECONOMIC IMPLICATIONS
dc.subjectECONOMIC RESEARCH
dc.subjectEMERGING ECONOMIES
dc.subjectENFORCEMENT MECHANISMS
dc.subjectENTERPRISE DEVELOPMENT
dc.subjectENTREPRENEURS
dc.subjectEQUATIONS
dc.subjectEQUIPMENT
dc.subjectEXPECTED RETURNS
dc.subjectEXTERNAL FINANCE
dc.subjectFACTOR DEMAND
dc.subjectFACTORS OF PRODUCTION
dc.subjectFARMER
dc.subjectFINANCE ACCESS
dc.subjectFINANCE CONSTRAINTS
dc.subjectFINANCES
dc.subjectFINANCIAL CONSTRAINT
dc.subjectFINANCIAL CONSTRAINTS
dc.subjectFINANCIAL DEVELOPMENT
dc.subjectFINANCIAL FACTORS
dc.subjectFINANCIAL INSTITUTIONS
dc.subjectFINANCIAL INTERMEDIARY
dc.subjectFINANCIAL MARKETS
dc.subjectFINANCIAL NEEDS
dc.subjectFINANCIAL POLICY
dc.subjectFINANCIAL RESOURCES
dc.subjectFINANCIAL SECTOR
dc.subjectFIRM GROWTH
dc.subjectFIXED INPUTS
dc.subjectFIXED INVESTMENT
dc.subjectFOREIGN BANKS
dc.subjectFOREIGN DIRECT INVESTMENT
dc.subjectFOREIGN INFLOWS
dc.subjectFOREIGN TRADE
dc.subjectGDP
dc.subjectGROWTH RATE
dc.subjectHIGH INTEREST RATES
dc.subjectHOLDING
dc.subjectHOLDINGS
dc.subjectID
dc.subjectINCOME
dc.subjectINCOME EFFECT
dc.subjectINEFFICIENCY
dc.subjectINSTRUMENT
dc.subjectINTEREST RATE
dc.subjectINTEREST RATE SHOCKS
dc.subjectINTEREST RATES
dc.subjectINTERNAL FINANCE
dc.subjectINTERNAL FUNDS
dc.subjectINTERNATIONAL BANK
dc.subjectINVENTORIES
dc.subjectINVENTORY
dc.subjectINVESTMENT BEHAVIOR
dc.subjectINVESTMENT CLIMATE
dc.subjectINVESTMENT CLIMATE ASSESSMENT
dc.subjectINVESTMENT OPPORTUNITIES
dc.subjectINVESTMENT SPENDING
dc.subjectINVESTMENT-CASH FLOW SENSITIVITIES
dc.subjectLIMITED ACCESS
dc.subjectLIQUID ASSET
dc.subjectLIQUID ASSETS
dc.subjectLIQUIDITY
dc.subjectLIQUIDITY CONSTRAINT
dc.subjectLIQUIDITY CONSTRAINTS
dc.subjectMACROECONOMICS
dc.subjectMANUFACTURING INDUSTRIES
dc.subjectMARGINAL COST
dc.subjectMARGINAL PRODUCT
dc.subjectMARGINAL VALUE
dc.subjectMARKET CAPITALIZATION
dc.subjectMARKET INTEREST
dc.subjectMARKET INTEREST RATES
dc.subjectMARKET PRICE
dc.subjectMATURITY
dc.subjectMICROENTERPRISES
dc.subjectNEGATIVE SHOCK
dc.subjectNEGATIVE SHOCKS
dc.subjectNET WORTH
dc.subjectOPPORTUNITY COST
dc.subjectOPTIMIZATION
dc.subjectPERMANENT SHOCKS
dc.subjectPHYSICAL CAPITAL
dc.subjectPREPAYMENT
dc.subjectPRICE CHANGES
dc.subjectPRICE INCREASES
dc.subjectPRICE TAKERS
dc.subjectPRIVATE INVESTMENT
dc.subjectPRIVATE SECTOR DEVELOPMENT
dc.subjectPRODUCTION EFFICIENCY
dc.subjectPRODUCTION FUNCTION
dc.subjectPRODUCTION INPUTS
dc.subjectPROFIT MAXIMIZING
dc.subjectPROFIT OPPORTUNITY
dc.subjectRATE OF GROWTH
dc.subjectREAL INTEREST
dc.subjectREAL INTEREST RATE
dc.subjectRECEIPT
dc.subjectRECEIPTS
dc.subjectRETURN
dc.subjectSALES REVENUE
dc.subjectSAVINGS
dc.subjectSECONDARY MARKETS
dc.subjectSHORT TERM DEBT
dc.subjectSOURCES OF FINANCE
dc.subjectSTOCK EXCHANGES
dc.subjectSUBSTITUTION EFFECT
dc.subjectSUPPLY SHOCKS
dc.subjectTERM CREDIT
dc.subjectTERMS OF CAPITAL
dc.subjectTRADE CREDIT
dc.subjectTRADE LIBERALIZATION
dc.subjectTURNOVER
dc.subjectVALUE OF OUTPUT
dc.subjectVOLATILE ENVIRONMENTS
dc.subjectVOLATILITY
dc.subjectWAGES
dc.subjectWEALTH
dc.subjectWORKING CAPITAL
dc.titleFinancial Constraints, Working Capital and the Dynamic Behavior of the Firmen
dspace.entity.typePublication
okr.crossref.titleFinancial Constraints, Working Capital and the Dynamic Behavior of the Firm
okr.date.disclosure2014-03-01
okr.date.doiregistration2025-04-10T11:38:35.980958Z
okr.doctypePublications & Research::Policy Research Working Paper
okr.doctypePublications & Research
okr.docurlhttp://documents.worldbank.org/curated/en/2014/03/19190163/financial-constraints-working-capital-dynamic-behavior-firm
okr.globalpracticeMacroeconomics and Fiscal Management
okr.globalpracticeFinance and Markets
okr.globalpracticeTrade and Competitiveness
okr.guid671161468153856096
okr.identifier.doi10.1596/1813-9450-6797
okr.identifier.externaldocumentum000158349_20140303114924
okr.identifier.internaldocumentum19190163
okr.identifier.reportWPS6797
okr.language.supporteden
okr.pdfurlhttp://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/03/03/000158349_20140303114924/Rendered/PDF/WPS6797.pdfen
okr.region.administrativeSouth Asia
okr.region.countryBangladesh
okr.topicFinance and Financial Sector Development::Access to Finance
okr.topicMacroeconomics and Economic Growth::Investment and Investment Climate
okr.topicEconomic Theory and Research
okr.topicPrivate Sector Development::Emerging Markets
okr.topicFinance and Financial Sector Development::Debt Markets
okr.unitFinance and Private Sector Unit, South Asia Region
okr.volume1 of 1
relation.isSeriesOfPublication26e071dc-b0bf-409c-b982-df2970295c87
relation.isSeriesOfPublication.latestForDiscovery26e071dc-b0bf-409c-b982-df2970295c87
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