The Impact of Financial Constraints on Firm Survival and Growth

Observatoire Français des Conjonctures Économiques
Journal of Evolutionary Economics (Impact Factor: 1). 02/2008; 18(2):135-149. DOI: 10.1007/s00191-007-0087-z
Source: RePEc


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 (1) financial constraints significantly increase the probability of exiting the market,
(2) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and
employment, (3) financial constraints are positively related with productivity growth in the short-run. 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

Download full-text


Available from: Stefano Schiavo, Oct 04, 2015
82 Reads
  • Source
    • "Successful innovation, capital intensity, profitability and productivity usually lead to a longer lifespan for a firm (Audretsch, 1991; Bellone, Musso, Nesta, & Quéré, 2008; Fotopoulos & Louri, 2000). In contrast, financial constraints (Bridges & Guariglia, 2008; Headd, 2003; Musso & Schiavo, 2008), as well as costs of innovation that are beyond a company's means (Boyer & Blazy, 2013) increase the likelihood of exit. "
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper contributes to the growing body of business survival literature that focuses on regional determinants of the hazard faced by firms. Using parametric survival analysis, we test the effects of regional innovation on exit likelihood in the US computer and electronic product manufacturing dur- ing the 1992–2008 period. The novelty of our approach is in conditioning the effects of metropolitan innovation on firm size. Estimation results suggest a negative relationship between metropolitan patenting activity and survival of firms that started with 1–3 employees. This effect decreases if companies grow. Establishments with more than 4 employees at start-up are insensitive to metropolitan innovation, although size of firms that started with 4–9 employees improves their survival chances. These findings indicate that local knowledge spillovers do not translate into lower hazard. The negative relationship indicates either a creative destruction regime or decisions of entrepreneurs to shut down existing ventures in order to pursue other opportunities.
    Small Business Economics 10/2014; DOI:10.1007/s11187-014-9550-z · 1.80 Impact Factor
  • Source
    • "Most studies operationalize resource slack and constraints at the firm level, using financial ratios (Greve, 2003) or measures that compare resource availability with industry averages as a proxy for resource demand (Bromiley, 1991; Daniel et al., 2004; George, 2005; Mishina et al., 2004). However, financial ratios often fail to reflect a firm's resource availability or ability to invest accurately (Bottazzi, Secchi, & Tamagni, 2012; Kaplan & Zingales, 1997, 2000; Musso & Schiavo, 2008), nor do these measures indicate the firm's actual resource demand (George, 2005), which is problematic if slack or constraints depend on perceived resource demands (George, 2005; Mishina et al., 2004; Renko et al., 2010). In addition, the majority of studies in this area adopt a cross-sectional approach, measuring slack or constraints at a single point in time, such that they ignore changes over time (Bourgeois, 1981; Mishina et al., 2004; Moses, 1992) and possibly conceal the underlying dynamics (Nohria & Gulati, 1996) that might explain the mixed results obtained from previous studies. "
    [Show abstract] [Hide abstract]
    ABSTRACT: Previous studies of the effects of resource slack and constraints on creativity and performance offer contradictory findings. To resolve this debate, some authors operationalize resource slack and constraints in ways that actually may have concealed their underlying complexity and dynamics. This study seeks to demonstrate how perceived resource positions influence entrepreneurial decision making and creativity by drawing on in-depth case studies of three high-tech start-ups. The authors show that resource positions are perceived, relative, transient and multidimensional; that is, they reflect the entrepreneur’s perception of available resources relative to demand. Moreover, perceived resource positions are not static but change over time, and entrepreneurs can experience different types of resource constraints and slack simultaneously. The influence of perceived resource positions on decision making in turn depends on individual, temporal and resource position dynamics. These findings link perceptions of resources to the emergence of organizational ingenuity, by explaining how perceived resource positions influence decision making.
    Organization Studies 03/2014; 35(4):511-549. DOI:10.1177/0170840613517598 · 2.33 Impact Factor
  • Source
    • "To be noted is that this unresolved debate has stimulated some researchers to steer away from analyses based on cash flow sensitivities and opt for a more encompassing measure of financial constraints. See for instance, Musso and Schiavo (2008), who develop a time-varying multivariate continuous index to identify the degree of financial constraints. a monotonic positive relation between the degree of financial constraints and the cash flow sensitivity. "
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper conducts an empirical investigation of the finance–growth nexus at firm level. We exploit a large panel of Italian manufacturing firms observed over the period 1998-2003 to jointly assess the impact of cash flow and leverage on corporate growth measured in terms of employees and sales. We tackle problems of endogeneity, unobservable heterogeneity and persistence by using a system GMM estimator fully developed by Blundell and Bond (1998). We find an inverted U-shaped relationship between debt and growth: at low levels, leverage exerts a positive influence on growth and yet there appears to be a negative relationship between growth and debt-exposure for fragile firms, i.e. highly leveraged ones. This finding is consistent with the idea that debt initially enables firms to broaden their financing options and provides additional resources to growth. Nevertheless, once debt-exposure reaches a certain threshold, liquidity and debt overhang effects prevail and negatively affect firm expansion. Highly leveraged firms are also endowed with relatively lower levels of internal cash flow and exhibit higher growth–cash flow sensitivity. We conclude that this latter result can be interpreted as evidence of the existence of financial constraints.
    Structural Change and Economic Dynamics 03/2013; 24(C):34-44. DOI:10.1016/j.strueco.2012.11.003
Show more