THE IMPACT OF INITIAL FINANCIAL STATE ON FIRM DURATION ACROSS ENTRY COHORTS*

Recent theories of industry dynamics emphasize the role of financial frictions in determining post entry performance of firms. Testing these theories has been difficult because of the lack of financial data on small, young and private firms. Using a unique data set, T2LEAP, this paper considers the survival of new firms in Canadian manufacturing from a financial perspective. Duration analysis quantifies the effects of firm, industry and aggregate factors. Findings show that nonlinear effects are found with firm leverage. Finally, likelihood decompositions offer insights into the contributing factors to firm hazard for nine entry cohorts during the period 1985–1997.     

Monetary Policy in the Media

Just like private companies depend crucially on their ability to reach customers, policymakers must communicate with private agents to be successful—and much of this communication is channeled through the media. This is especially true for central banks, which need to build credibility among the general public. This paper analyses how favorably the print media report about the European Central Bank's (ECB) monetary policy decisions. Favorableness is, inter alia, influenced by the amount of information communicated by the ECB. There are, however, also indications of a critical monitoring role of the media, which reports more negatively when inflation exceeds the inflation target.     

Private Equity and Local Public Finances

We study the economic impact of private equity (PE) investments on local governments, which are important corporate stakeholders. Examining over 11,000 deals and private firm data in Europe, we document that target firms' effective tax rates and total tax expenses decrease by 15% and 13% after PE deals. At the same time, target firms expand their capital expenditures and firm boundaries, but do not increase employment. Using administrative data on the public finances of German municipalities and exploiting the geographical and time-series variation in PE deals, we document that PE activity is negatively associated with local governments' tax revenues and spending. This result is likely driven by reduced tax payments of PE portfolio firms, accompanied by only modest positive spillovers of PE investments on regional economic growth. Collectively, our findings suggest that corporate tax efficiency serves as a cost-cutting channel in the PE sector and constrains the finances of local governments.