Growth, volatility, and credit market imperfections: evidence from German firms

Growth, volatility, and credit market imperfections: evidence from German firms Purpose – The purpose of this paper is two‐fold. First, it studies whether output volatility and growth are linked at the firm‐level, using data for German firms. Second, it explores whether the link between volatility and growth depends on the degree of credit market imperfections. Design/methodology/approach – The authors use a novel firm‐level dataset provided by the Deutsche Bundesbank, the so‐called Financial Statements Data Pool. The dataset has time series observations for German firms for the period 1997‐2004, and the authors use information on the debt‐to‐assets or leverage ratio of firms to proxy for credit‐constraints at the firm‐level. As additional proxies for the importance of credit market imperfections, we use information on the size and on the legal status of firms. Findings – The authors find that higher volatility has a negative impact on growth for small and a positive impact for larger firms. Higher leverage is associated with higher growth. At the same time, there is heterogeneity in the determinants of growth across firms from different sectors and across firms with a different legal status. Practical implications – While most traditional macroeconomic models assume that growth and volatility are uncorrelated, a number of microeconomic models suggest that the two may be linked. However, it is unclear whether the link is positive or negative. The paper presents additional evidence regarding this question. Moreover, understanding whether credit market conditions affect the link between volatility and growth is of importance for policy makers since it suggests a channel through which the credit market can have long‐run welfare implications. The results stress the importance of firm‐level heterogeneity for the effects and effectiveness of economic policy measures. Originality/value – The paper has two main novel features. First, it uses a novel firm‐level dataset to analyze the determinants of firm‐level growth. Second, it analyzes the growth‐volatility nexus using firm‐level data. To the best of the authors' knowledge, this is the first paper, which addresses the link between volatility, growth, and credit market imperfections using firm‐level data. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Growth, volatility, and credit market imperfections: evidence from German firms

Journal of Economic Studies, Volume 35 (3): 15 – Aug 1, 2008

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0144-3585
DOI
10.1108/01443580810887814
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is two‐fold. First, it studies whether output volatility and growth are linked at the firm‐level, using data for German firms. Second, it explores whether the link between volatility and growth depends on the degree of credit market imperfections. Design/methodology/approach – The authors use a novel firm‐level dataset provided by the Deutsche Bundesbank, the so‐called Financial Statements Data Pool. The dataset has time series observations for German firms for the period 1997‐2004, and the authors use information on the debt‐to‐assets or leverage ratio of firms to proxy for credit‐constraints at the firm‐level. As additional proxies for the importance of credit market imperfections, we use information on the size and on the legal status of firms. Findings – The authors find that higher volatility has a negative impact on growth for small and a positive impact for larger firms. Higher leverage is associated with higher growth. At the same time, there is heterogeneity in the determinants of growth across firms from different sectors and across firms with a different legal status. Practical implications – While most traditional macroeconomic models assume that growth and volatility are uncorrelated, a number of microeconomic models suggest that the two may be linked. However, it is unclear whether the link is positive or negative. The paper presents additional evidence regarding this question. Moreover, understanding whether credit market conditions affect the link between volatility and growth is of importance for policy makers since it suggests a channel through which the credit market can have long‐run welfare implications. The results stress the importance of firm‐level heterogeneity for the effects and effectiveness of economic policy measures. Originality/value – The paper has two main novel features. First, it uses a novel firm‐level dataset to analyze the determinants of firm‐level growth. Second, it analyzes the growth‐volatility nexus using firm‐level data. To the best of the authors' knowledge, this is the first paper, which addresses the link between volatility, growth, and credit market imperfections using firm‐level data.

Journal

Journal of Economic StudiesEmerald Publishing

Published: Aug 1, 2008

Keywords: Capital growth; Credit; Market forces; Germany; Economic models

References

  • Money volatility and output volatility: any asymmetric effects? Evidence from conditional measures of volatility
    Alpergis, N.; Miller, S.

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