Do liquidity constraints matter in explaining firm size and growth? Some evidence from the Italian manufacturing industry

Abstract

The paper investigates whether liquidity constraints affect firm size and growth dynamics using a large longitudinal sample of Italian manufacturing firms. We run standard panel-data Gibrat regressions, suitably expanded to take into account liquidity constraints (proxied by cash flow scaled by firm sales). Moreover, we characterize the statistical properties of firms size, growth, age, and (scaled) cash flow distributions. Pooled data show that: (i) liquidity constraints engender a negative, statistically significant, effect on growth once one controls for size; (ii) smaller firms grow more (and experience more volatile growth patterns) after controlling for liquidity constraints; (iii) the stronger liquidity constraints, the more size negatively affects firm growth. We find that pooled size distributions depart from log-normality and growth rates are well approximated by fat-tailed, tent-shaped (Laplace) densities. We also study the evolution of growth-size distributions over time. Our exercises suggest that the strong negative impact of liquidity constraints on firm growth which was present in the pooled sample becomes ambiguous when one disaggregates across years. Finally, firms who were young and strongly liquidity-constrained at the beginning of the sample period grew persistently more than those who were old and weakly liquidity-constrained.

Entrepreneurship and the process of firms' entry, survival and growth

“…In contrast, credit constraints and lack of financial capital in general should limit both the likelihood of survival and the rate of growth of newborn firms (see Xu, 1998;Carpenter and Petersen, 2002;Becchetti and Trovato, 2002), in accordance with the empirical literature providing evidence that smaller firms are financially constrained by comparison with their larger counterparts (see Binks and Ennew, 1996;Fagiolo and Luzzi, 2006). …”

Firm Growth and Liquidity Constraints: A Dynamic Analysis

“…(2002) for Germany; Cabral and Mata (2003) for Portugal; Desai et al (2003) and Wagenvoort (2003) for Europe; Fagiolo and Luzzi (2004) for Italy; and Hutchinson and Xavier (2004) for Slovenia and Belgium). These studies follow Fazzari, Hubbard and Petersen (1988) who investigated the effect of cash flow on investment.…”

“…Following Elston (2002), Fagiolo and Luzzi (2004) also analyse whether liquidity constraints faced by business firms affect the dynamics of firm size and growth. Considering a balanced panel data set of manufacturing Italian firms over the period 1995-2000 they estimated firm growth specifications by pooled OLS, suitably expanded to take liquidity constraints into account.…”

Assessing Determinants on Job Creation at the Firm Level: Swedish Micro Firm Data

“…Consequently, firms' employment decisions, like any fixed capital investment decision, are affected by firms' financial constraints. Thus, liquidity access is an important precondition for firm investment and growth (Audretsch & Elston, 2002;Beck, Demirgüç-Kunt, & Maksimovic, 2005;Carpenter & Petersen, 2002;Fagiolo & Luzzi, 2006;Hutchinson & Xavier, 2006;Oliveira & Fortunato, 2006). However, liquidity access has generally been regarded as a common challenge for small and young businesses (Evans & Jovanovic, 1989).…”