The impact of financial constraints on firm survival and growth

Abstract

We propose a new approach for identifying and measuring the degree of financial constraint faced by firms and use it to investigate the effect of financial constraints on firm survival and development. Using panel data on French manufacturing firms over the 1996 -2004 period, we find that (i) financial constraints significantly increase the probability of exiting the market, (ii) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and employment, (iii) financial constraints are positively related with productivity growth in the shortrun. We interpret this last result as the sign that constrained firms need to cut costs in order to generate the resources they cannot raise on financial markets.

Determinants of Financial Constraints: The Effect of Financial Crisis and Heterogeneity Across Industries

“…Indeed, large and convincing evidence exists showing that, when a standard investment equation is augmented with cash flow availability, the fit of the equation improves (Musso and Schiavo, 2008). Theory and empirical evidence suggest that credit constraints are tighter for those THE 6TH INTERNATIONAL CONFERENCE "THE CHANGING ECONOMIC LANDSCAPE: ISSUES, IMPLICATIONS AND POLICY OPTIONS" firms expected to face relatively severe asymmetries of information.…”

“…Artola and Genre, 2011, Kumar and Francisco, 2005, overview in Musso and Schiavo, 2008 and are thus based on self-assessment together with all its disadvantages. The other empirical approach to detect financial constraints is based on segmentation of firms into groups based on one or more different criteria, such as dividend policy, size, age, and membership in a group of conglomerate, existence of bond rating or concentration of ownership (see Musso and Schiavo, 2008, for a comprehensive review of these studies). One of the main weaknesses of these studies is first its time invariance, second, when dividend policy is concerned, the analysis is restricted to quoted firms, which are usually also larger and more mature.…”

“…In defining financial constraints we follow the methodology first proposed by Musso and Schiavo (2008) and extended by Bellone et.al (2010), who constructed a synthetic index from seven dimensions of financial status of the firm, i.e. firm size, its profitability, liquidity, cash flow generating ability, firm's solvency, share of trade credit, and ability of repaying debt.…”

“…Although high scarcity of external financial resources is characteristic not only for Slovenia, but actually for Eastern Europe in general (Marer, 2010), Slovenia has been hit even worse by the liquidity aspect of the current crisis due to high instability of the Slovenian banking system. We measure Slovenian firms' financial health according to the methodology first proposed by Musso and Schiavo (2008) and extended by Bellone et al (2010). We construct a synthetic index from seven different variables that carry important information relative to the existence of financial constraints to the firm.…”

Do financial constraints threat the innovation process? Evidence from Portuguese firms

“…Other strategies include the construction of indexes of variables that are generally agreed to be good proxies of constraints (e.g. Musso and Schiavo, 2008;Hovakimien and Hovakimien, 2009) or, if data is available, resort to firms' self-evaluation of constraints (e.g. Angelini and Generale, 2005;Savignac, 2008).…”