IDEAS home Printed from https://ideas.repec.org/a/eso/journl/v46y2015i1p51-86.html
   My bibliography  Save this article

Do Credit Constraints Affect SME Investment and Employment?

Author

Listed:
  • Petra Gerlach-Kristen

    (Swiss National Bank, Zurich, Switzerland)

  • Brian O'Connell

    (Indecon International Economic Consultants, Dublin)

  • Conor O'Toole

    (Central Bank of Ireland)

Abstract

This paper explores the potential presence of credit constraints confronting Irish SMEs and investigates the impact of these constraints on firms’ employment and investment. Using new survey data collected by the Department of Finance, we define firms as credit rationed or discouraged borrowers and link these constraints to employment and the propensity to invest. We find a negative and significant effect of SME credit constraints on employment for firms that are discouraged from applying for credit. We also find a negative effect of constraints on the probability of an SME investing. This effect is driven by firms who are credit rationed when seeking capacity expansion loans.

Suggested Citation

  • Petra Gerlach-Kristen & Brian O'Connell & Conor O'Toole, 2015. "Do Credit Constraints Affect SME Investment and Employment?," The Economic and Social Review, Economic and Social Studies, vol. 46(1), pages 51-86.
    • Handle: RePEc:eso:journl:v:46:y:2015:i:1:p:51-86
    as

    Download full text from publisher

    File URL: https://www.esr.ie/article/view/291/103
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hernando, Ignacio & Martínez-Carrascal, Carmen, 2008. "The impact of financial variables on firms' real decisions: Evidence from Spanish firm-level data," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 543-561, March.
    2. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
    3. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    4. Holton, Sarah & McCann, Fergal, 2012. "Irish SME credit supply and demand: comparisons across surveys and countries," Economic Letters 08/EL/12, Central Bank of Ireland.
    5. Casey, Eddie & O'Toole, Conor M., 2014. "Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 173-193.
    6. Thorsten Beck & Asli Demirguc‐Kunt & Luc Laeven & Ross Levine, 2008. "Finance, Firm Size, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1379-1405, October.
    7. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
    8. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
    9. Galindo, Arturo & Schiantarelli, Fabio & Weiss, Andrew, 2007. "Does financial liberalization improve the allocation of investment?: Micro-evidence from developing countries," Journal of Development Economics, Elsevier, vol. 83(2), pages 562-587, July.
    10. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August.
    11. Sebnem Kalemli-Ozcan & Herman Kamil & Carolina Villegas-Sanchez, 2016. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 756-769, October.
    12. Beck, Thorsten & Demirguc-Kunt, Asli & Laeven, Luc & Maksimovic, Vojislav, 2006. "The determinants of financing obstacles," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 932-952, October.
    13. Ryan, Robert M. & O’Toole, Conor M. & McCann, Fergal, 2014. "Does bank market power affect SME financing constraints?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 495-505.
    14. O'Toole, Conor & Casey, Eddie, 2014. "Bank-lending Constraints, Trade Credit and Alternative External Finance since the Financial Crisis: Evidence from European SMEs," Papers RB2014/2/3, Economic and Social Research Institute (ESRI).
    15. Canton, E.J.F. & Grilo, I. & Monteagudo, J. & van der Zwan, P.W., 2012. "Perceived credit constraints in the European Union," ERIM Report Series Research in Management ERS-2010-001-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    16. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 197-222.
    17. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    18. Spaliara, Marina-Eliza, 2009. "Do financial factors affect the capital-labour ratio? Evidence from UK firm-level data," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1932-1947, October.
    19. Kashyap, Anil K. & Zingales, Luigi, 2010. "The 2007-8 financial crisis: Lessons from corporate finance," Journal of Financial Economics, Elsevier, vol. 97(3), pages 303-305, September.
    20. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
    21. Gabriel Chodorow-Reich, 2014. "The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008-9 Financial Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(1), pages 1-59.
    22. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Cathy Patillo & Måns S–derbom & Francis Teal & Albert Zeufack, 2003. "Credit Constraints in Manufacturing Enterprises in Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 12(1), pages 104-125, March.
    23. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    24. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    25. Ongena, Steven & Şendeniz-Yüncü, İlkay, 2011. "Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3213-3224.
    26. FitzGerald, John & Kearney, Ide & Bergin, Adele & Conefrey, Thomas & Duffy, David & Timoney, Kevin & Znuderl, Nusa, 2013. "Medium-Term Review: 2013-2020, No. 12," Forecasting Report, Economic and Social Research Institute (ESRI), number MTR12, June.
    27. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    28. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    29. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, vol. 68(3), pages 353-378, June.
    30. Clarke, George R.G. & Cull, Robert & Martinez Peria, Maria Soledad, 2006. "Foreign bank participation and access to credit across firms in developing countries," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 774-795, December.
    31. Ferrando, Annalisa & Griesshaber, Nicolas, 2011. "Financing obstacles among euro area firms: Who suffers the most?," Working Paper Series 1293, European Central Bank.
    32. Moyen, Nathalie, 2007. "How big is the debt overhang problem?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 433-472, February.
    33. Lawless, Martina & McCann, Fergal, 2011. "Credit Access for Small and Medium Firms: Survey Evidence for Ireland," Research Technical Papers 11/RT/11, Central Bank of Ireland.
    34. Bruce Byiers & John Rand & Finn Tarp & Jeanet Bentzen, 2010. "Credit demand in Mozambican manufacturing," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 37-55.
    35. Christopher A. Hennessy, 2004. "Tobin's "Q", Debt Overhang, and Investment," Journal of Finance, American Finance Association, vol. 59(4), pages 1717-1742, August.
    36. Beck, Thorsten & Demirgüç-Kunt, Asli & Maksimovic, Vojislav, 2008. "Financing patterns around the world: Are small firms different?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 467-487, September.
    37. Conor M. O'Toole & Carol Newman & Thia Hennessy, 2014. "Financing Constraints and Agricultural Investment: Effects of the Irish Financial Crisis," Journal of Agricultural Economics, Wiley Blackwell, vol. 65(1), pages 152-176, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cornille, David & Rycx, François & Tojerow, Ilan, 2019. "Heterogeneous effects of credit constraints on SMEs’ employment: Evidence from the European sovereign debt crisis," Journal of Financial Stability, Elsevier, vol. 41(C), pages 1-13.
    2. Cornille, David & Rycx, François & Tojerow, Ilan, 2018. "Heterogeneous Effects of Credit Constraints on SMEs' Employment: Evidence from the Great Recession," IZA Discussion Papers 11257, Institute of Labor Economics (IZA).
    3. Christina Kinghan & Carol Newman & Conor M. O'Toole, 2018. "Capital allocation, credit access, and firm growth in Vietnam," WIDER Working Paper Series wp-2018-67, World Institute for Development Economic Research (UNU-WIDER).
    4. Carol Newman & Conor O’Toole & Christina Kinghan, 2018. "Capital allocation, credit access, and firm growth in Vietnam," WIDER Working Paper Series 67, World Institute for Development Economic Research (UNU-WIDER).
    5. Cantillon, Leona & Gargan, Eric & Kren, Janez & Lawless, Martina & O'Toole, Conor, 2022. "Recent trends in SME investment in Ireland: exploring the pandemic and barriers to growth," Research Series, Economic and Social Research Institute (ESRI), number SUSTAT113, June.
    6. Kren, Janez & Lawless, Martina & O'Toole, Conor, 2021. "Cost of doing business during COVID-19: SME investment in public health compliance," Papers WP701, Economic and Social Research Institute (ESRI).
    7. Lawless, Martina & Martinez-Cillero, Maria & O'Toole, Conor, 2021. "SME investment determinants and financing constraints: A stochastic frontier approach," Papers WP699, Economic and Social Research Institute (ESRI).
    8. Marie Finnegan & Supriya Kapoor, 2023. "ECB unconventional monetary policy and SME access to finance," Small Business Economics, Springer, vol. 61(3), pages 1253-1288, October.
    9. Carroll, James & Mooney, Paul & O'Toole, Conor, 2016. "Irish SME Investment in Economic Recovery," Quarterly Bulletin Articles, Central Bank of Ireland, pages 77-91, March.
    10. O’Toole, Conor & Hennessy, Thia, 2015. "Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture," Food Policy, Elsevier, vol. 56(C), pages 67-75.
    11. Conor M. O'Toole & Martina Lawless & Derek Lambert, 2015. "Non-Bank Financing in Ireland: A Comparative Perspective," The Economic and Social Review, Economic and Social Studies, vol. 46(1), pages 133-161.
    12. McQuinn, Kieran & O’Toole, Conor & Economides, Philip, 2018. "Quarterly Economic Commentary, Autumn 2018," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC, June.
    13. David Cornille & François Rycx & Ilan Tojerow, 2017. "The employment consequences of SMEs’ credit constraints in the wake of the great recession," Working Paper Research 333, National Bank of Belgium.
    14. Wellalage, Nirosha Hewa & Locke, Stuart, 2020. "Formal credit and innovation: Is there a uniform relationship across types of innovation?," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 1-15.
    15. Lawless, Martina & O’Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).
    16. Martinez-Cillero, Maria & Lawless, Martina & O'Toole, Conor, 2023. "Analysing SME investment, financing constraints and its determinants. A stochastic frontier approach," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 578-588.
    17. Lawless, Martina & O’Connell, Brian & O’Toole, Conor, 2015. "SME recovery following a financial crisis: Does debt overhang matter?," Journal of Financial Stability, Elsevier, vol. 19(C), pages 45-59.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gerlach, Petra & O'Connell, Brian & O'Toole, Conor, 2013. "SME Credit Constraints and Macroeconomic Effects," Papers WP467, Economic and Social Research Institute (ESRI).
    2. Casey, Eddie & O'Toole, Conor M., 2014. "Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 173-193.
    3. Christina Kinghan & Carol Newman & Conor M. O'Toole, 2018. "Capital allocation, credit access, and firm growth in Vietnam," WIDER Working Paper Series wp-2018-67, World Institute for Development Economic Research (UNU-WIDER).
    4. Casey, Eddie & O'Toole, Conor, 2013. "Bank-lending constraints and alternative financing during the financial crisis: Evidence from European SMEs," Papers WP450, Economic and Social Research Institute (ESRI).
    5. Carol Newman & Conor O’Toole & Christina Kinghan, 2018. "Capital allocation, credit access, and firm growth in Vietnam," WIDER Working Paper Series 67, World Institute for Development Economic Research (UNU-WIDER).
    6. O’Toole Conor M., 2014. "Does Financial Liberalisation Improve Access to Investment Finance in Developing Countries?," Journal of Globalization and Development, De Gruyter, vol. 5(1), pages 1-34, June.
    7. David Cornille & François Rycx & Ilan Tojerow, 2017. "The employment consequences of SMEs’ credit constraints in the wake of the great recession," Working Paper Research 333, National Bank of Belgium.
    8. O'Toole, Conor M. & Morgenroth, Edgar L.W. & Ha, Thuy T., 2016. "Investment efficiency, state-owned enterprises and privatisation: Evidence from Viet Nam in Transition," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 93-108.
    9. Conor O'Toole & Carol Newman, 2012. "Investment Financing and Financial Development: Firm Level Evidence from Vietnam," The Institute for International Integration Studies Discussion Paper Series iiisdp409, IIIS.
    10. Rashid Ameer, 2014. "Financial Constraints, Debt Overhang And Corporate Investment: A Panel Smooth Transition Regression Approach," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 55-80.
    11. O’Toole, Conor & Hennessy, Thia, 2015. "Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture," Food Policy, Elsevier, vol. 56(C), pages 67-75.
    12. Günay, Hüseyin & Kılınç, Mustafa, 2015. "Credit market imperfections and business cycle asymmetries in Turkey," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 79-98.
    13. Fátima Herranz González & Carmen Martínez-Carrascal, 2017. "The impact of firms’ financial position on fixed investment and employment. An analysis for Spain," Working Papers 1714, Banco de España.
    14. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
    15. Ignacio Hernando & André Tiomo, 2002. "Financial constraints and investment in France and Spain: a comparison using firm level data," Working Papers 0214, Banco de España.
    16. repec:unu:wpaper:wp2012-67 is not listed on IDEAS
    17. O’Toole Conor M., 2014. "Does Financial Liberalisation Improve Access to Investment Finance in Developing Countries?," Journal of Globalization and Development, De Gruyter, vol. 5(1), pages 1-34, June.
    18. Charalambos P. Charalambous & Marios C. Polemidiotis, 2017. "Wage Dynamics Network: SME Credit Constraints in Cyprus During the Period 2010-2013 and Effects on Employment, Wages and Prices," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 11(2), pages 63-85, December.
    19. Filipe Silva & Carlos Carreira, 2012. "Measuring Firms’ Financial Constraints: A Rough Guide," Notas Económicas, Faculty of Economics, University of Coimbra, issue 36, pages 23-46, December.
    20. Ann E. Harrison & Inessa Love & Margaret S. McMillan, 2022. "Global capital flows and financing constraints," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 8, pages 181-213, World Scientific Publishing Co. Pte. Ltd..
    21. Muhammad Saad Baloch & Abubakr Saeed & Ishtiaq Ahmed & Judit Oláh & József Popp & Domicián Máté, 2018. "Role of Domestic Financial Reforms and Internationalization of Non-Financial Transnational Firms: Evidence from the Chinese Market," Sustainability, MDPI, vol. 10(11), pages 1-16, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:46:y:2015:i:1:p:51-86. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Aedin Doris (email available below). General contact details of provider: https://www.esr.ie .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.