Meta-analysis of the impact of financial constraints on firm performance

Abstract

A large number of studies have investigated the relationship between financial constraints and firm performance. However, due to heterogeneity in study design factors, such as choice of measures for constraints and performance, control variables, estimation methods and study sample, the empirical results have been mixed. To mitigate this issue, this paper reports a meta-analysis of the association between financial constraints and firm performance. To assess the overall direction of the relationship and the sources of heterogeneity, we apply meta-analytic methods to 26 studies (providing 189 effect sizes) on the association between financial constraints and financial performance in listed companies. Our result shows that, overall, there is a positive relationship between financial constraints and firm performance. In addition, meta-regression results suggest that return on assets (ROA) and return on equity (ROE) as measures of financial performance, and external finance and size as measures of financial constraints, have a significant negative impact on the relationship between financial constraints and firm performance relative to the mean impact on effect size. Similarly, all of North America and Asia as regional differences, control of size and corporate governance as control variables, and journal quality as strength of results, also have a significant negative impact. On the other hand, market value as a measure of financial performance, and the Whited & Wu index as a measure of financial constraints, have significant positive impact relative to the mean impact. Similarly, cross-country and Europe as regional differences, and publication status as strength of results, all have significant positive impact. Given that firm performance is of fundamental importance to investors, this study therefore helps researchers and policymakers to understand the variation in the empirical results on the impact of financial constraints.