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The impact of financial constraints on firm survival and growth

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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 markets.

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Notes

  1. The variables are (1) cash flow to fixed assets, (2) market to book ratio, (3) debt to total assets, (4) dividends to fixed assets, and (5) cash to fixed assets.

  2. The variables included in the model are (1) the ratio of long-term to total debt, (2) a dividend dummy, (3) sales growth (both for the individual firm and the sector), (4) (the log of) total assets, (5) the number of analysts following the firm, (6) the ratio of liquid to total assets, (7) the industry debt to assets ratio.

  3. There are (1) the current ratio, (2) the debt ratio, (3) the fixed charge coverage, (4) the net income margin, (5) sale growth, and (6) slack over total assets. See Cleary (1999) for a definition of the variables.

  4. This is very much similar to what a probit or a logit estimation would do. In fact, multiple discriminant analysis is nothing more than an ancestor of these methodologies, which, because of current computer power, are probably preferable as more robust.

  5. An obvious requirement of this methodology is working with quoted firms. One could then derive a score for non quoted firms as well, but it is not clear how well the index would behave.

  6. This is the maximum amount of resources that a firm can devote to self-financing, and corresponds to the French capacité d’autofinancement.

  7. To account for the presence of outliers we trim the top and bottom 0.5% observations for each variable.

  8. We have tried other ways to combine the information, with identical results. Additional details are available upon request.

  9. The survey (Enquête Annuelle d’Entreprises) is conducted by the French Ministry of Industry. The surveyed unit is the legal (not the productive) unit, which means that we are dealing with firm-level data. To investigate the role of financial constraints on growth and survival, firm, rather than plant level data, seem appropriate.

  10. Chirinko and Schaller (1995) note that focusing on manufacturing only—as it is often done in the literature—may exaggerate the role played by financial constraints because of the specialized nature of the assets involved in those firms.

  11. See Bellone et al. (2008) for more details on the method and a full description of the variables.

  12. See Chapters 17 and 18 of Cameron and Trivedi (2005) for a discussion on the appropriate choice of distribution for the parameter of unobserved heterogeneity.

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Acknowledgements

The authors blame each other for any remaining mistakes. They nevertheless agree on the need to thank Sylvain Barde, Flora Bellone, Jean-Luc Gaffard, Sarah Guillo, Evens Salies, and above all Lionel Nesta for useful comments and discussions.

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Authors and Affiliations

  1. GREDEG (CNRS) and CERAM Business School, University of Nice-Sophia Antipolis, 250 rue Albert Einstein, 06560, Valbonne, France

    Patrick Musso

  2. Département de Recherche sur l’Innovation et la Concurrence, Observatoire, Français des Conjonctures Economiques, Valbonne, France

    Stefano Schiavo

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  1. Patrick Musso
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Correspondence to Patrick Musso.

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Musso, P., Schiavo, S. The impact of financial constraints on firm survival and growth. J Evol Econ 18, 135–149 (2008). https://doi.org/10.1007/s00191-007-0087-z

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