To What Extent Does the Interest Burden Affect Firm Survival? Evidence from a Panel of UK Firms during the Recent Financial Crisis

Abstract

Using a panel of mainly unquoted UK firms over the period 2000-09, we document a significant effect of changes in the interest burden from debt-servicing on firm survival. The effect is found to be stronger during the recent financial crisis compared with more tranquil periods. Furthermore, the survival chances of bank-dependent, younger, and nonexporting firms are most affected by changes in the interest burden, especially during the crisis. Our results are robust to using different estimation methods and different interest burden measures. They suggest that one way for policymakers to mitigate the effects of financial crises by limiting firm failures would be to prevent financing costs from rising, especially for those firms more likely to face liquidity constraints.(Word count: 8,746+ 3 tables= 10, 246) * JEL Classification numbers: D21; E22; E32; G31. We thank the Editor and two anonymous referees for very helpful comments and suggestions. We are also grateful to

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