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


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.

Divisions: College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
College of Business and Social Sciences > Aston Business School > Aston India Foundation for Applied Research
College of Business and Social Sciences > Aston Business School
Additional Information: © 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.
Last Modified: 27 Dec 2023 10:15
Date Deposited: 08 Mar 2013 11:24
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PURE Output Type: Working paper
Published Date: 2012-10
Authors: Bhaumik, Sumon (ORCID Profile 0000-0002-4459-3659)
Bonner, Karen
Hart, Mark (ORCID Profile 0000-0002-0402-4128)



Version: Published Version

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