How does financial pressure affect firms?

Abstract

How does monetary policy work? While one aspect of the investigation has focused on the behaviour of consumers, another has concentrated on the behaviour of companies faced with the kind of financial pressure associated with tight monetary policy. The general focus in this area is on the impact of financial constraints on investment expenditures including fixed capital and inventories. Our purpose is to shift this focus somewhat and to concentrate on the impact of financial pressure on other aspects of company behaviour. We first discuss briefly the theoretical background and the empirical formulation. Then, using panel data on a large number of UK companies, we derive a number of results.

Financing Constraints and Unemployment: Evidence from the Great Recession

“…Our paper also reinforces the conclusions in Gertler and Gilchrist (1994), who …nd that growth in sales, inventories, and bank debt of small manufacturing …rms is more sensitive to monetary policy shocks than that of larger …rms. Similarly, these …ndings are consistent with other studies that document the impact of credit constraints on investment spending (Fazzari, Hubbard, and Peterson 1988, Gertler and Hubbard 1988, Hoshi, Kashyap, and Scharfstein 1991, Whited 1992, Kashyap, Lamont, and Stein 1994, and Duchin, Ozbas, and Sensoy 2010 and employment (Sharpe 1994, Nickell and Nicolitsas 1999, Gozzi and Goetz 2010, Benmelech, Bergman, and Seru 2011, and Bascim, Baskaya, and Kilinc 2011. Methodologically, our paper di¤ers from the latter papers in that we di¤erentiate …rms by both size and external …nancial dependence.…”

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

“…Bond & Meghir, 1994;Fazzari, Hubbard, & Petersen, 1988). Some other works and, in particular, the empirical evidence suggest that financial pressure affects employment (Benito & Hernando, 2002;Bond & Meghir, 1994;Bond & Van Reenen, 2007;Cantor 1990;Nickell & Nicolitsas 1999;Sharpe 1994). As suggested by Modigliani & Miller (1958) there is no association between a firm's financial structure and its value, implying that a firm's financing choice has no effect on its real operation.…”

“…Similarly, according to Acemoglu (2001), financial constraints are regarded as obstacles to employment since they hinder new investment, especially in new innovative firms that create jobs. Nickell & Nicolitsas (1999) found evidence that there was a negative association between the employment level and the cost of capital measured in terms of the ratio of interest payments to cash flow. Furthermore, Arnold (2002) reports an association between financial constraints and employment.…”

“…The interaction between labour and financial market institutions has been regarded as one of the important determinants for aggregate employment, based on the industrial organization perspective or on a liquidity constraint approach (Benito & Hernando, 2008;Nickell & Nicolitsas, 1999;Nickell & Wadhwani, 1991;Sharpe,1994). However, the association between financing difficulty and employment at the firm level has been less frequent and subject to only a few empirical studies (Nickell & Nicolitsas, 1999;Sharpe, 1994).…”

“…However, the association between financing difficulty and employment at the firm level has been less frequent and subject to only a few empirical studies (Nickell & Nicolitsas, 1999;Sharpe, 1994). To fill these gaps in the literature, the purpose of the current study is to empirically examine the firm-level job-creation determinants among Swedish micro firms.…”