Financial constraints and firm efficiency: Further empirical evidence

In this paper, we empirically explore the impact of financial constraints on firms' efficiency. To this end, we estimate a stochastic production frontier model, addressing input endogeneity and incorporating "environmental" variables that may impact efficiency. Using four distinct financial constraint indexes, we show that firms facing such constraints may be more efficient. This can be attributed to the accumulation of internal funds as a precautionary measure and improved resource allocation. In addition, our findings highlight differential impacts across financial constraint indexes, shedding light on the complex relationship between financial constraints and firms' efficiency levels.