Financial constraints and firm dynamics

Abstract

The short run effects of financial constraints (FCs) on the expected growth rate of firms and their long-term implications on the evolution of the firm size distribution have been recently investigated by several scholars. In this paper we extend the analysis to a wider and largely unexplored range of possible FCs effects, including the autoregressive and heteroskedastic structure of the firm growth process and the degree of asymmetry in the distribution of growth shocks. We measure FCs with an official credit rating index which directly captures the borrowers' opinion on a firm's financial soundness and, consequently, the availability and cost of external resources. Our investigations reveal that FCs operate through several channels. In the short term, FCs reduce the average firm growth rate, induce anti-correlation in growth shocks and reduce the dependence of growth rates volatility on size. Financing constraints also operate through asymmetric threshold effects, both preventing potentially fast growing firms from enjoying attractive growth opportunities, and further deteriorating the growth prospects of already slow growing firms. The sub-diffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution.

The Relationship between the Risk of a Change of the Interest Rate and the Age of Entrepreneurs among Slovak SMEs

“…Our findings are conformal with the results of the majority of studies that prove significant relations between these two factors, e.g. surveys of Bottazzi et al (2014) and Vos et al (2007). They bring evidence that younger firms face the financial and credit risk more intensively than older and larger firms.…”

“…Bottazzi et al (2014) and Vos et al (2007) bring the evidence that smaller and younger firms have more limited possibilities of external financing than larger and older firms. Vos et al (2007) state that there are coherences among the age and the level of education of entrepreneur and the interest rate of drawing finance from external funds.…”

“…Their small size is according to such authors as Steinerowska-Streb and Steiner (2014), Irwin and Scott (2010), Mercieca et al (2009), Belás (2015b), Dong and Men (2014), Cheng, Tang and Shi (2012) often a reason why they more intensively face the financial risk and also the credit risk. Also Vos et al (2007), Bottazzi et al (2014), Lazányi (2014), Oliveira and Fortunato (2006), Dong and Men (2014), Hernández-Cánovas and Martínez-Solano (2010), Bougheas et al (2006), Pickernell et al (2011), Riding et al (2012) declare that the credit risk is higher in the group of younger entrepreneurs. The aim of this paper is to prove by the statistical method that the age of entrepreneurs (SMEs) should be considered as a relevant factor with the significant impact on the intense of credit risk in general, and its part -the risk of a change of the interest rate -in particular in Slovakia.…”

Persistent high-growth firms in China’s manufacturing

“…Internal profits and cash flow have a central importance in the literature on financial constraints to investment and growth, at least since the seminal study in Fazzari et al (1988). In fact, a large literature reports that internal finance and credit rationing provides critical constraints to growth, especially for young and small enterprises (for reviews, see Oliveira and Fortunato, 2006;Bottazzi et al, 2014). However, only few exceptions look for the existence of financial constraints to high-growth.…”

The Impact of Credit Rating on Innovation in a Two-Sector Evolutionary Model

“…For example, those firms that are less profitable and less innovative are expected to grow at a comparatively low rate or to exit the market under an efficient mechanism in place. This is however, not observed in an Italian sample when there are financial constraints (Bottazzi et al, 2006(Bottazzi et al, , 2014Bottazzi et al, 2010). Public subsidies can remedy constraints as they not only help most those firm in dire need of external funding (Hyytinen and Toivanen, 2003) but also increase the trust in creditworthiness by others and thus may enable external financing in the future (Takalo and Tanayama, 2010).…”