FINANCIAL CONSTRAINTS, GLOBAL ENGAGEMENT, AND FIRM SURVIVAL IN THE UNITED KINGDOM: EVIDENCE FROM MICRO DATA
| DOI | http://doi.org/10.1111/j.1467-9485.2008.00461.x |
| Author | Sarah Bridges,Alessandra Guariglia |
| Date | 01 September 2008 |
| Published date | 01 September 2008 |
FINANCIAL CONSTRAINTS, GLOBAL
ENGAGEMENT, AND FIRM SURVIVAL
IN THE UNITED KINGDOM: EVIDENCE
FROM MICRO DATA
Sarah Bridges
n
and Alessandra Guariglia
n
Abstract
Financial constraints have been found to play an important role on various aspects
of firm behavior. Yet, their effects on firm survival have been largely neglected. We
use a panel of 61,496 UK firms over the period 1997–2002 to study the effects of
financial variables on firms’ failure probabilities, differentiating firms into globally
engaged and purely domestic. Estimating a wide range of specifications, we find
that lower collateral and higher leverage result in higher failure probabilities for
purely domestic than for globally engaged firms. This can be seen as evidence that
global engagement shields firms from financial constraints.
I Intro ductio n
Financial constraints have been found to play an important role in various
aspects of firm behavior, such as determining their investment in fixed capital,
inventories, and R&D (see Hubbard, 1998; Bond and Van Reenen, 2007, for
surveys). Most studies in this literature have used firm-level data to estimate
investment equations augmented with financial variables such as cash flow, and
interpreted a high sensitivity of investment to these variables as a proxy for a
high degree of financing constraints faced by firms. A financially constrained
firm, for which it is difficult or too expensive to obtain external finance, will in
fact only invest if it has sufficient internal funds, and will invest more (less) the
higher (lower) its cash flow.
1
Higher sensitivities were generally found for firms
that were a priori more likely to face financing constraints, such as small, young
firms, and firms with low-dividend payouts and high levels of indebtedness.
Yet, surprisingly, the effects of financial constraints on firm survival have
been largely neglected in the literature: only a handful of papers have included
financial variables in equations modelling survival probabilities (Zingales, 1998;
Fotopoulos and Louri, 2000; Bunn and Redwood, 2003; Vartia, 2004).
2
Using
n
University of Nottingham
1
This view has been challenged by Kaplan and Zingales (1997), Cleary (1999), and Cummins
et al. (2006).
2
Throughout the paper, we use the terms survival and failure interchangeably, keeping in
mind that one is the flip side of the other.
Scottish Journal of Political Economy, Vol. 55, No. 4, September 2008
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Journal compilation r2008 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
444
data from a wide range of countries, they found a significant association
between financial variables and firms’ survival probabilities. Yet, none of these
studies exploited firm heterogeneity to better understand this link. This paper
seeks to fill this gap. Specifically, we analyze for the first time the effects of
financial variables on firm survival probabilities, differentiating firms into
globally engaged and purely domestic. We consider two dimensions of global
engagement. The first is based on whether the firms are foreign-owned, and the
second on whether they export.
3
Differentiating the effects of financial variables
on survival probabilities for globally engaged and domestic firms is motivated by
a number of recent empirical papers, which argue that global engagement may
shield firms from financial constraints, and consequently improve their
performance. Using data for the United Kingdom, Guariglia and Mateut
(2005), for example, find that small, young, and risky firms that are globally
engaged exhibit lower sensitivities of inventory investment to financial variables
than their domestic counterparts. This makes them less financially constrained,
as they do not have to rely as much on internal funds to finance inventory
investment.
4
Similarly, using data from various emerging markets, Desai et al.
(2007) document that, contrary to their purely domestic counterparts, affiliates
of multinational firms are able to expand output after severe depreciations when
both growth opportunities and financial constraints arise. Finally, focusing on
Indonesia, Blalock et al. (2008) show that following the 1997 East Asian
financial crisis which led to a strong currency devaluation, only foreign-owned
exporters were able to significantly increase their investment. Although the
global engagement-induced improvements in plant performance documented by
these authors are likely to translate themselves into increases in their chances of
survival, none of these studies have explicitly tested whether global engagement
affects firm survival, by shielding firms from liquidity constraints. This is the
objective of this paper.
The main reasons why global engagement may shield firms from liquidity
constraints can be summarized as follows. First, globally engaged firms have
access to both internal and international financial markets, which allows them to
diversify their sources of financing and the associated risks. In particular,
foreign-owned firms can access credit through their parent company and thus
insure themselves against liquidity constraints (Desai et al., 2004). Second,
foreign-owned firms typically enjoy less bankruptcy risk and adopt international
standards faster in terms of product quality. Consequently, they find it easier to
gain access to domestic banks (Colombo, 2001; Harrison and McMillan, 2003).
Third, being dependent on demand from foreign countries, exporting firms are
tied less to the domestic cycle, and less subject to those financial constraints
3
A number of papers (Bernard and Sjo
¨holm, 2003; Go
¨rg and Strobl, 2003) have looked at the
direct effects of global engagement on firm survival. However, their main focus is on
multinationals’ voluntary exit from a market, which takes place by shifting production from
one country to another in the presence of adverse shocks in the host country. Contrary to theirs,
our analysis mainly focuses on firms’ death as a consequence of failure (involuntary exit).
4
Also see Greenaway et al. (2007), who using the same UK data limited to the manufacturing
sector, find that exporters typically exhibit better financial health than non-exporters.
EVIDENCE FROM MICRO DATA 445
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Journal compilation r2008 Scottish Economic Society
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