Do investments in human and physical capital respond differently to financing constraints?

Using a representative sample of European firms, we study whether financing constraints affect employers' investments in employee training and physical capital differently. We measure financing constraints with an index that combines survey and balance sheet data. We instrument this index with the non-performing loans ratio of the bank that provided the last loan to the firms or with the average ratio of banks in the local area. We find that financing constraints have no effect on investment in training, but substantially reduce investment in physical capital.