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Firm Growth and Liquidity Constraints: A Dynamic Analysis

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  • Blandina Oliveira

    ()

  • Adelino Fortunato

    ()

Abstract

Using a large unbalanced panel data set of Portuguese manufacturing firms surviving over the period from 1990 to 2001, the purpose of this paper is to examine whether liquidity constraints faced by business firms affect firm growth. We use a GMM-system to estimate a dynamic panel data model of firm growth that incorporates cash flow as a measure of liquidity constraints and persistence of growth. The model is estimated for all size classes, including micro firms. Our findings reveal that smaller and younger firms have higher growth-cash flow sensitivities than larger and more mature firms. This is consistent with the suggestion that financial constraints on firm growth may be relatively more severe for small and young firms. Nevertheless, the same finding can be interpreted in a different way if we consider the more recent literature which interpret the higher investment/cash flow sensitivity of younger and smaller firm in absence of financial market imperfection as the outcome of these firms reaction to the fact that realisation of their cash flows reveals them the direction to go in presence of uncertainty of their growth prospect. Besides, firms that were small and young at the beginning of the sample period exhibited more persistent growth than those that were large and old. Finally, these results have significant policy implications. Copyright Springer 2006

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Bibliographic Info

Article provided by Springer in its journal Small Business Economics.

Volume (Year): 27 (2006)
Issue (Month): 2 (October)
Pages: 139-156

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Handle: RePEc:kap:sbusec:v:27:y:2006:i:2:p:139-156

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Web page: http://www.springerlink.com/link.asp?id=100338

Related research

Keywords: firm growth; firm size; GMM estimator; liquidity constraints; panel data; C23; G32; L11;

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  1. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
  2. John Hutchinson & Ana Xavier, 2006. "Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy," Small Business Economics, Springer, vol. 27(2), pages 169-179, October.
  3. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  4. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  5. Elston, Julie Ann, 2002. "An Examination of the Relationship Between Firm Size, Growth and Liquidity in the Neuer Markt," Discussion Paper Series 1: Economic Studies 2002,15, Deutsche Bundesbank, Research Centre.
  6. Goddard, John & Wilson, John & Blandon, Peter, 2002. "Panel tests of Gibrat's Law for Japanese manufacturing," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 415-433, March.
  7. Klapper, Leora & Sarria-Allende, Virginia & Sulla, Victor, 2002. "Small and medium size enterprise financing in Eastern Europe," Policy Research Working Paper Series 2933, The World Bank.
  8. Giorgio Fagiolo & Alessandra Luzzi, 2004. "Do Liquidity Constraints Matter in Explaining Firm Size and Growth? Some Evidence from the Italian Manufacturing Industry," LEM Papers Series 2004/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  9. Becchetti, Leonardo & Trovato, Giovanni, 2002. " The Determinants of Growth for Small and Medium Sized Firms: The Role of the Availability of External Finance," Small Business Economics, Springer, vol. 19(4), pages 291-306, December.
  10. Spiros Bougheas & Holger Görg & Eric Strobl, 2003. "Is R & D Financially Constrained? Theory and Evidence from Irish Manufacturing," Review of Industrial Organization, Springer, vol. 22(2), pages 159-174, March.
  11. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
  12. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.
  13. Mihir Desai & Paul Gompers & Josh Lerner, 2003. "Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe," NBER Working Papers 10165, National Bureau of Economic Research, Inc.
  14. José Fariñas & Lourdes Moreno, 2000. "Firms' Growth, Size and Age: A Nonparametric Approach," Review of Industrial Organization, Springer, vol. 17(3), pages 249-265, November.
  15. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, . "What Determines Firm Size?," CRSP working papers 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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