IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v21y2008i2p543-577.html
   My bibliography  Save this article

Production in Entrepreneurial Firms: The Effects of Financial Constraints on Labor and Capital

Author

Listed:
  • Mark J. Garmaise

Abstract

I model the contrasting capital-labor decisions of financially constrained and unconstrained firms. I show that financially restricted firms use relatively more labor than physical capital because informed employees provide more efficient financing than uninformed capital suppliers. I demonstrate that constrained firms cannot easily attract new employees to replace existing staff. Their greater employee retention aligns owner-worker incentives and encourages workers to make firm-specific investments. Constrained firms, however, gradually suffer from their inability to replace low-quality workers, such that their relative labor productivity decreases over time. Empirical tests utilizing instrumental variables confirm several implications of the theory. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Mark J. Garmaise, 2008. "Production in Entrepreneurial Firms: The Effects of Financial Constraints on Labor and Capital," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 543-577, April.
  • Handle: RePEc:oup:rfinst:v:21:y:2008:i:2:p:543-577
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhm081
    Download Restriction: Access to full text is restricted to subscribers.

    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. Mariassunta Giannetti & Andrei Simonov, 2009. "Social Interactions and Entrepreneurial Activity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 665-709, September.
    2. Gompers, Paul & Kovner, Anna & Lerner, Josh & Scharfstein, David, 2008. "Venture capital investment cycles: The impact of public markets," Journal of Financial Economics, Elsevier, vol. 87(1), pages 1-23, January.
    3. Landier, Augustin & Thesmar, David, 2003. "Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence," CEPR Discussion Papers 3971, C.E.P.R. Discussion Papers.
    4. De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
    5. de Meza, David & Southey, Clive, 1996. "The Borrower's Curse: Optimism, Finance and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 106(435), pages 375-386, March.
    6. Arabsheibani, Gholamreza & de Meza, David & Maloney, John & Pearson, Bernard, 2000. "And a vision appeared unto them of a great profit: evidence of self-deception among the self-employed," Economics Letters, Elsevier, vol. 67(1), pages 35-41, April.
    7. Ramana Nanda & Jesper B. Sørensen, 2010. "Workplace Peers and Entrepreneurship," Management Science, INFORMS, pages 1116-1126.
    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. Giannetti, Mariassunta & Ongena, Steven, 2012. "“Lending by example”: Direct and indirect effects of foreign banks in emerging markets," Journal of International Economics, Elsevier, pages 167-180.
    2. 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.
    3. Natasha Agarwal & Chris Milner & Alejandro Riaño, "undated". "Credit Constraints and FDI Spillovers in China," Discussion Papers 11/21, University of Nottingham, GEP.
    4. Kenichi Ueda & Stijn Claessen, 2016. "Monopoly Rights and Economic Growth: An Inverted U-Shaped Relation," CARF F-Series CARF-F-396, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Jae-Seung Han & Sang-Yong Lee, 2013. "The impact of technology transfer contract on a firm’s market value in Korea," The Journal of Technology Transfer, Springer, vol. 38(5), pages 651-674, October.
    6. Ilona Babenko & Rik Sen, 2016. "Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans," Management Science, INFORMS, pages 1878-1898.
    7. Nuri Ersahin, 2017. "Creditor Rights, Technology Adoption, and Productivity: Plant-Level Evidence," Working Papers 17-36, Center for Economic Studies, U.S. Census Bureau.
    8. Aarstad Jarle, 2014. "Structural Holes and Entrepreneurial Decision Making," Entrepreneurship Research Journal, De Gruyter, vol. 4(3), pages 1-16, July.
    9. Uras, Burak R., 2014. "Corporate financial structure, misallocation and total factor productivity," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 177-191.
    10. Borck, Rainald & Tabuchi, Takatoshi, 2015. "Pollution and city size: can cities be too small?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113124, Verein für Socialpolitik / German Economic Association.
    11. Ongena, Steven & Cerqueiro, Geraldo & Roszbach, Kasper, 2016. "Collateral damage? On collateral, corporate financing and performance," Working Paper Series 1918, European Central Bank.
    12. Giannetti, Mariassunta & Ongena, Steven, 2012. "“Lending by example”: Direct and indirect effects of foreign banks in emerging markets," Journal of International Economics, Elsevier, pages 167-180.
    13. Kenichi Ueda & Stijn Claessens, 2008. "Banks and Labor as Stakeholders; Impact on Economic Performance," IMF Working Papers 08/229, International Monetary Fund.
    14. repec:eee:jeeman:v:84:y:2017:i:c:p:189-208 is not listed on IDEAS
    15. Santiago Carbó Valverde & Francisco Rodríguez-Fernández & Gregory F. Udell, 2008. "Bank lending, financing constraints and SME investment," Working Paper Series WP-08-04, Federal Reserve Bank of Chicago.
    16. Boustanifar, Hamid, 2014. "Finance and employment: Evidence from U.S. banking reforms," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 343-354.

    More about this item

    Statistics

    Access and download statistics

    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:oup:rfinst:v:21:y:2008:i:2:p:543-577. 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: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    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.

    We have no references for this item. You can help adding them by using 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.