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The Role of Financial Constraints in the Services Sector: How Different is it from Manufacturing?

Author

Listed:
  • Filipe Silva

    (OECD, Paris)

  • Carlos Carreira

    (FEUC-GEMF)

Abstract

Although the services sector has emerged as a major contributor to gross domestic product and employment in developed economies, very little attention has been paid to financial constraints faced by services firms. This paper represents a first attempt to model financial constraints in the services sector. In particular, we question the commonly accepted inverse relationship between firm size/age and financial constraints. To conduct our empirical tests, we estimate the Cash-Cash Flow Sensitivity using a large unbalanced panel of Portuguese firms. We also combine the recently developed Hovakimian-Hovakimian index of firm’s financial constraints with the sensitivity of cash stocks to cash-flow approach. Our results suggest that there are clear differences in financial constraints across the two sectors. First, firms operating in the services sector suffer from more severe financial constraints than those in manufacturing. Second, the relationship between size and financial constraints appears to be inverse in the case of the manufacturing sector, but not in services, for which we have U-shaped evidence. Finally, for the services sector we find some evidence suggesting an inverse relationship between age and financial constraints, while in manufacturing this relationship seems to be U-shaped.

Suggested Citation

  • Filipe Silva & Carlos Carreira, 2016. "The Role of Financial Constraints in the Services Sector: How Different is it from Manufacturing?," Notas Económicas, Faculty of Economics, University of Coimbra, issue 43, pages 21-41, June.
    • Handle: RePEc:gmf:journl:y:2016:i:43:p:21-41
    DOI: 10.14195/2183-203x_43_2
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    References listed on IDEAS

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    Cited by:

    1. Francesco Bripi & David Loschiavo & Davide Revelli, 2020. "Services trade and credit frictions: Evidence with matched bank–firm data," The World Economy, Wiley Blackwell, vol. 43(5), pages 1216-1252, May.
    2. Silva Filipe & Carreira Carlos, 2017. "Financial Constraints: Do They Matter to Allocate R&D Subsidies?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(4), pages 1-26, October.
    3. Shubin Yang & Chris Milner & Sandra Lancheros & Saileshsingh Gunessee, 2020. "Access to Finance, Technology Investments and Exporting Decisions of Indian Services Firms," Open Economies Review, Springer, vol. 31(5), pages 1009-1036, November.

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    More about this item

    JEL classification:

    • L8 - Industrial Organization - - Industry Studies: Services
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L00 - Industrial Organization - - General - - - General
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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