Aswath Damodaran 221
The sources of capital rationing...
Cause Number of firms Percent of total
Debt limit imposed by outside agreement 10 10. 7
Debt limit placed by management external
to firm
3 3. 2
Limit placed on borrowing by internal
management
65 69. 1
Restrictive policy imposed on retained
earnings
2 2. 1
Maintenance of target EPS or PE ratio 14 14. 9
In a world where firms had free and complete access to capital markets and
information could be conveyed credibly to financial markets, there would be no
capital rationing constraints. Any firm with a good project (positive NPV) would
be able to raise the funds to take the investment. In the real world, there are
market frictions that can cause capital rationing. This table is the result of an old
survey (1976) which tried to identify the reasons for capital rationing.
More often than not, the source of capital rationing s not external (lack of access
to markets, inability to convey information, transactions costs) but by internal
factors (management is conservative, restrictions on human capital...)
