Abstract and Keywords
The importance of both debt and equity funding being allocated efficiently among firms has not gone unnoticed in the academic and practitioner literatures. A disproportionate amount of effort, however, has been devoted to the theory of capital constraints rather than to conducting rigorous empirical work to identify and measure them. Moreover governments around the world, often for questionable motives (typically, vote winning), have had reason to perpetuate the idea of persistent (structural, cycle-independent) debt and equity gaps in their economies. By subsidizing such gaps they hope to garner the votes of the millions of self-employed who are only too happy to receive subsidies to create or perpetuate their failing businesses. It is thus crucial for correct academic analysis and policy formulation to have a critical review of the literature on funding constraints and to highlight the established empirical facts of constraints along with the theories. With this context in mind, this article reviews some of the seminal contributions to the finance gap literature and of their empirical tests.
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