IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v35y2011i3p709-723.html
   My bibliography  Save this article

Access to financing and firm growth

Author

Listed:
  • Rahaman, Mohammad M.

Abstract

Why do some firms grow faster than others? Although various observed and unobserved aspects of firms have been suggested as potential drivers of firm heterogeneity, economists disagree sharply on the role of financial structure in influencing firm growth. In this paper, I use a sample of quoted and unquoted firms to show that the effect of financial structure on firm growth is statistically significant and quantitatively important. In the presence of external financing constraints, firms rely more on internal funds to finance growth, but the effect of internal financing on firm growth decreases with an increase in the firm's access to an external bank credit facility. As the external financing constraint is alleviated, the firm relies less on internal funds and switches to external financing as the primary source of financing for its growth. This pattern of transition between internal and external financing is particularly pronounced in small unquoted firms (conditional on their survival). These results suggest a real effect of financial structure on growth via the channel of an external financing constraint.

Suggested Citation

  • Rahaman, Mohammad M., 2011. "Access to financing and firm growth," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 709-723, March.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:3:p:709-723
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00337-7
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. Chittenden, Francis & Hall, Graham & Hutchinson, Patrick, 1996. "Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation," Small Business Economics, Springer, vol. 8(1), pages 59-67, February.
    3. 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.
    4. Dunne, Paul & Hughes, Alan, 1994. "Age, Size, Growth and Survival: UK Companies in the 1980s," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 115-140, June.
    5. de la Torre, Augusto & Martínez Pería, María Soledad & Schmukler, Sergio L., 2010. "Bank involvement with SMEs: Beyond relationship lending," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2280-2293, September.
    6. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    7. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    10. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-674, August.
    11. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    12. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
    13. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
    14. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
    15. Scott, Jonathan A. & Dunkelberg, William C., 2010. "Competition for small firm banking business: Bank actions versus market structure," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2788-2800, November.
    16. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    17. Sakai, Koji & Uesugi, Iichiro & Watanabe, Tsutomu, 2010. "Firm age and the evolution of borrowing costs: Evidence from Japanese small firms," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1970-1981, August.
    18. Ajit Singh & Geoffrey Whittington, 1975. "The Size and Growth of Firms," Review of Economic Studies, Oxford University Press, vol. 42(1), pages 15-26.
    19. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    20. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    21. Knyazeva, Anzhela & Knyazeva, Diana & Stiglitz, Joseph, 2009. "Ownership changes and access to external financing," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1804-1816, October.
    22. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    23. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    24. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
    25. Hart, Peter E & Oulton, Nicholas, 1996. "Growth and Size of Firms," Economic Journal, Royal Economic Society, vol. 106(438), pages 1242-1252, September.
    26. Huang, Roger D & Kracaw, William A, 1984. " Stock Market Returns and Real Activity: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 267-273, March.
    27. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
    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. repec:tou:journl:v:45:y:2017:p:99-112 is not listed on IDEAS
    2. Badeeb, Ramez Abubakr & Lean, Hooi Hooi & Smyth, Russell, 2016. "Oil curse and finance–growth nexus in Malaysia: The role of investment," Energy Economics, Elsevier, vol. 57(C), pages 154-165.
    3. Rahaman, Mohammad M., 2014. "Do managerial behaviors trigger firm exit? The case of hyperactive bidders," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 92-110.
    4. Anoosheh Rostamkalaei & Mark Freel, 2016. "The cost of growth: small firms and the pricing of bank loans," Small Business Economics, Springer, vol. 46(2), pages 255-272, February.
    5. Everett, Craig R. & K., John, 2013. "Private Businesses Predict Limited Growth for 2013," MPRA Paper 55528, University Library of Munich, Germany.
    6. Giorgio Canarella & Stephen M. Miller, 2017. "The Determinants of Growth in the Information and Communication Technology (ICT) Industry: A Firm-Level Analysis," Working papers 2017-12, University of Connecticut, Department of Economics.
    7. Matevž Rašković & Maja Makovec Brenčič & Barbara Moerec, 2011. "Trust and management-to-employee communication in Slovenian companies: Some evidence from the current economic crisis," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 23(2), pages 165-187.
    8. Mosharref Hossain & Yusnidah Ibrahim & Mohan Uddin, 2016. "Towards the Factors affecting Small Firm Growth: Review of Previous Studies," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(5), pages 217-235, May.
    9. Dereje Regasa & David Fielding & Helen Roberts, 2017. "Access to Financing and Firm Growth: Evidence from Ethiopia," Working Papers 1707, University of Otago, Department of Economics, revised Apr 2017.
    10. repec:kap:jincot:v:17:y:2017:i:2:d:10.1007_s10842-016-0216-1 is not listed on IDEAS
    11. Davydov, Denis, 2016. "Debt structure and corporate performance in emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 299-311.
    12. Matjaž Volk & Polona Trefalt, 2014. "Access to Credit as a Growth Constraint," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(1), pages 29-39, May.
    13. Law, Siong Hook & Azman-Saini, W.N.W. & Ibrahim, Mansor H., 2013. "Institutional quality thresholds and the finance – Growth nexus," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5373-5381.
    14. Tian, Xiaowen & Slocum, John W., 2015. "The decline of global market leaders," Journal of World Business, Elsevier, vol. 50(1), pages 15-25.
    15. Maricica Moscalu, 2015. "Integration between the Romanian and the Euro Area Financial Markets and its Impact on the Growth Rate of Romanian Listed Companies," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(4), pages 138-149, August.
    16. Hasan Ayaydin & Pinar Hayaloglu, 2014. "The Effect of Corruption on Firm Growth: Evidence from Firms in Turkey," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(5), pages 607-624, May.
    17. repec:pal:eurjdr:v:29:y:2017:i:2:d:10.1057_s41287-016-0010-2 is not listed on IDEAS

    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:eee:jbfina:v:35:y:2011:i:3:p:709-723. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jbf .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.