Firm Growth and Liquidity Constraints: A Dynamic Analysis

Abstract

Using a large unbalanced panel data set of Portuguese manufacturing firms surviving over the period from 1990 to 2001, the purpose of this paper is to examine whether liquidity constraints faced by business firms affect firm growth. We use a GMM-system to estimate a dynamic panel data model of firm growth tha t incorporates cash flow as a measure of liquidity constraints and persistence of growth. The model is estimated for all size classes, including micro firms. Our findings suggest that smaller and younger firms have higher growth-cash flow sensitivities tha n larger and more mature firms. This is consistent with the suggestion that financial constraints on firm growth may be relatively more severe for small and young firms. Finally, firms that were small and young and strongly liquidity-constrained at the beginning of the sample period exhibited more persistent growth than those that were large and old and weakly liquidity-constrained. These results have significant policy implications.

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

“…Many of these researchers also confirm an association between these challenges and employment. The association between firm liquidity constraints and investment, growth and employment has been highlighted by previous research (Acemoglu, 2001;Oliveira & Fortunato, 2006).…”

“…However, market imperfections in terms of asymmetric information problems, moral hazards, agency conflicts between shareholders and managers, labour market regulations, and distortionary taxation, lead to the separation of investment and financing decisions. Small firms are shown to suffer more from the problems related to market imperfections and, in particular, liquidity constraints than larger firms (Myers, 1984;Myers & Majluf, 1984;Oliveira & Fortunato, 2006). Thus, liquidity constraints are even more important for more vulnerable firms, that is, small businesses at start-up (Myers, 1984;Myers & Majluf, 1984).…”

“…On the other hand, young firms without established credit histories and reputations face more problems related to information asymmetry in obtaining credit. Age, therefore, is assumed to be positively related to access to debt capital, liquidity and job creation (Audretsch, 1995;Broersma & Gautier, 1997;Oliveira & Fortunato, 2006). Financial constraints in terms of low debt capacity and limited access to liquidity are regarded as one of the most important barriers to employment (Yazdanfar, 2011).…”

“…These studies have analysed firm-level data and found relationships between employment and variables such as size (Broersma & Gautier, 1997;Hall, 1987;Oliveira & Fortunato, 2006;Singh & Whittington, 1975), age (Audretsch, 1995;Broersma & Gautier, 1997;Jovanovic, 1982;Oliveira & Fortunato, 2006), leverage (Carpenter & Petersen, 2002;Fazzari, Hubbard, &Petersen, 1988, Heisz andLaRochelle-Côté, 2004;Lang, Ofek, & Stulz 1996;Yazdanfar, 2011), liquidity (Acemoglu, 2001;Funke, Maurer, Siddiqui, & Strulik, 1998;Winker, 1999). Since firm size and age have an influence on information asymmetry, they are relevant when studying liquidity constraints (Myers, 1984;Myers & Majluf, 1984).…”

“…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).…”