Liquidity Constraints and Firm's Export Activity
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)
April 1, 2010
Centro Studi Luca d'Agliano Development Studies Working Paper No. 291
This paper will assess the importance of internal firm resources in overcoming sunk entry costs associated with export. When firms are not able to raise additional external funds for investments, they are credit-constrained, and in such a case, new exporters have to rely on their internal liquidity to pay sunk costs. Using a data set of small and medium size Italian enterprises (SMEs), we find that entry probability in the export market is affected by the level of cash stock for constrained ﬁrms. We propose a methodology used to identify a priori constrained firms, employing index analysis as used in business economics. The estimation of the Euler equation for investments confirms the fitness of our classification. In addition, we find that exporters show higher liquidity if they raise the number of destinations. Finally, we do not find evidence that entry in the export market improves firm’s financial health, while ex-ante new entrants are found to be relatively more leveraged.
Number of Pages in PDF File: 44
Keywords: Credit Constraints, Heterogenous Firms, Trade
JEL Classification: C14, D24, F10, F12, F13, F19, M40working papers series
Date posted: July 22, 2010
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