Firms' investment, indebtedness and financial constraints: Size does matter

This paper provides evidence of the importance of size in explaining the impact of financing conditions on firms' investment rate. The study makes two main contributions: a) it allows the relationship between indebtedness and firms' investment to be non-linear; and b) it contrasts whether the impact of indebtedness and the degree of financial restriction differ depending on the size of the company (SME vs large). Results show that while in SMEs indebtedness has a negative impact on investment, there is a threshold beyond which this effect is even larger (based on a debt/assets ratio of 59%). However, in large companies the impact of indebtedness is positive although there is also a threshold (36.5%) from which the effect becomes negative and investment decreases. In the case of financial restrictions, investment decreases as the degree of financial restriction increases, but in SMEs the penalty is higher. From an economic impact perspective, the degree of financial constraints is much higher than that of indebtedness. These results highlight the importance of designing specific measures to improve conditions of access to financing for SMEs. This is even more important in the current context of the COVID-19 crisis, which is having a greater impact on smaller, less resilient firms.