Forex

unconstrained and non-distressed firms optimize their capital structures. In this section
we explore how excluding firms based on a variety of financial constraint or financial distress
measures affects our results. Previously, we used long-term debt issuance or reduction
as a measure of financial constraint. As additional robustness checks, we also identify
unconstrained firms based on the Cleary (1999) index, hereafter called CL, and the Whited
and Wu (2005) index, hereafter called WW. Separately, we also tighten our definition of
being financially unconstrained to include only firms that have made long term debt or
equity adjustments in the top quartile (as opposed to above the median). Finally, we tighten
our definition of being financially non-distressed to include firms with ZSCOREs in the top
quartile.
Cleary (1999) calculates a general financial constraint measure by grouping firms into
categories based on whether they increase or decrease dividend payments. Using this
classification procedure, Cleary (1999) performs discriminant analysis to obtain a measure
for financial constraint. We reproduce this procedure over Cleary’s (1999) sample period of
1987 to 1994 to obtain the coefficients for our CL index. In a recent paper, Whited and
Wu (2005) derive an alternative measure of financial constraint by formulating the dynamic
optimization problem of a firm that faces the constraint that the distributions of the firm
(e.g., dividends) need to exceed a certain lower bound. They parameterize the Lagrange
multiplier on this constraint and estimate its coefficients with GMM. Effectively, the WW
index indicates that a firm is financially constrained if its sales growth is considerably lower
than its industry’s sales growth. In other words, a highly constrained firm is a slow growing
firm in a fast growing industry. An unconstrained firm is a fast growing firm in a slow
growing industry.