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The impact of financial variables on firms' real decisions: evidence from Spanish firm-level data

  • Ignacio Hernando


    (Banco de España)

  • Carmen Martínez-Carrascal


    (Banco de España)

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    This paper analyses the impact of alternative measures of firms' financial health on their investment and employment decisions. The emphasis is on the analysis of disaggregated data on such financial indicators. For this purpose, itemised data from a sample of the non-financial firms reporting to the Banco de España Central Balance Sheet Data Office Annual Database for the period 1985-2001 is used. We find that corporate financial position –proxied by alternative indicators– affects business activity and that this impact is non-linear and becomes relatively more intense when financial pressure exceeds a certain threshold. We also construct, using different financial variables, composite indicators that summarize the non-linear impact that the financial position has on investment and employment. Our results suggest that the use of firm-level data is particularly relevant in episodes where the financial pressure on a significant number of firms reaches levels at which it has a pronounced influence on real activity. In these episodes, indicators based on aggregate data may not reliably reflect the system's financial soundness since they do not adequately reflect the vulnerability of the most fragile companies.

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    Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0319.

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    Length: 37 pages
    Date of creation: Dec 2003
    Date of revision:
    Handle: RePEc:bde:wpaper:0319
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    1. Nickell, Stephen & Wadhwani, Sushil B, 1989. "Employment Determination in British Industry: Investigations Using Micro-Data," CEPR Discussion Papers 320, C.E.P.R. Discussion Papers.
    2. Stephen Bond & Dietmar Harhoff & John Van Reenen, 2003. "Investment, R&D and financial constraints in Britain and Germany," LSE Research Online Documents on Economics 771, London School of Economics and Political Science, LSE Library.
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