Firm Growth and Liquidity Constraints: A Dynamic Analysis |
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Authors: | Blandina Oliveira Adelino Fortunato |
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Institution: | 1. Escola Superior de Tecnologia e Gest?o, Morro do Lena-Alto Vieiro Apartado 4163, 2411-901, Leiria, Portugal 2. Faculdade de Economia da Universidade de Coimbra, Av. Dias da Silva 165, 3004-512, Coimbra, Portugal
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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.
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Keywords: | firm growth firm size GMM estimator liquidity constraints panel data |
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