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

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 (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

  • Source
    [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.
  • [Show abstract] [Hide abstract]
    ABSTRACT: This paper documents the relative importance of firm, industry and aggregate factors on the post-entry performance of new firms. This study utilizes a unique administrative dataset, T2LEAP, which contains employment and balance sheet information for all incorporated Canadian firms. The data allow us to include financial variables such as the debt-to-asset ratio (leverage) and document their impact on firm survival. We perform duration analysis on all the entrant manufacturing firms during the period 1985–1996. In addition to leverage, we find that: firm characteristics such as size and labour productivity; industry conditions, such as the real exchange rate, the difference in the US–Canada tariff rates, entry penetration, and the capital–labour ratio; and aggregate conditions in terms of the yield gap also play a role in the survival prospects of new firms.
    Structural Change and Economic Dynamics 12/2012; 23(4):354–362.
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper examines the impact of foreign and domestic acquisitions on firm-level financial risk in Italy and Spain over the period 2002-2010. Our results indicate that foreign acquisition leads to a significant and steady reduction in financial risk. In contrast, the domestic acquisition effects are smaller and statistically less robust.
    University of Nottingham, GEP Research Paper Series. 11/2013; No. 2013/08.

Full-text (2 Sources)

Available from
May 26, 2014