Viewing 9 posts categorized under Financial Constraints

Supporting small firms through recessions and recoveries

March 30, 2023

Small firms often struggle in getting access to credit. This is especially true during recessions, when banks tighten credit supply. To overcome this, governments around the world have implemented different programs to help small firms. Despite the widespread implementation of these programs, evidence on their effectiveness is mixed and often challenged by difficulties in pinpointing the causal effects of the programs. For example, these programs are usually available to all small firms, who decide whether or not to enter the program.

Government support measures in Portugal during the COVID-19 pandemic

October 11, 2022

During the COVID-19 pandemic, the Portuguese government provided a plethora of different support measures for firms. These included state-guarantees for new loans and a public moratorium for existing ones. These measures have been essential to support firms in the most acute phase of the crisis by providing liquidity at reduced costs in a context of an abrupt increase in the level of risk. However, there are still open questions regarding the medium- to long-term impact of these measures.

Market stigma and bank capital

September 29, 2022

The Great Financial Crisis exposed vulnerabilities in the quality and quantity of banks’ capital. It was the catalyst for increasing regulatory capital requirements, including the introduction of macroprudential buffers that can be used during economic downturns to incentivize banks to continue providing credit to the economy instead of engaging in excessive de-leveraging or de-risking behaviors. However, market pressure to maintain or even increase capital ratios can constrain banks in using their buffers during economic downturns.

Loan guarantees and their implications for post-COVID-19 productivity

June 22, 2022

Many countries introduced or ramped-up loan guarantee schemes to bridge liquidity shortages as a key element of the policy response to the COVID-19 crisis. The analysis in this paper discusses the potential short and medium-term effects on productivity of loan guarantees via reallocation, relying on historical data on European firms. The findings suggest that, absent policy support, the COVID-19 shock had the potential to seriously distort market selection, as it would have raised sharply the probability to face financial difficulties across the whole distribution of firm-level productivity.

Cash holdings in start-ups and founder sociodemographic characteristics

June 7, 2022

This study examines the determinants of excess cash holdings for Portuguese non-financial start-ups established between 2006 and 2009, paying particular attention to the role of founder sociodemographic and educational characteristics. Cash is one of the most vital assets of a firm. Cash management is extremely crucial for new ventures as they often struggle to survive with very low levels of income and revenues during the first years. Moreover, start-up information is opaque to investors during their earliest years and assets are often intangible and knowledge based.

Financial constraints and the executive gender gap

February 1, 2022

This paper investigates how financing constraints following the 2008-9 financial crisis affected executive pay and the gender pay-gap of executives, as well as the share of females in executive positions. The paper uses employer-employee data for Portugal, and exploits pre-crisis variation in external finance dependence across industries to estimate the differential effect of the crisis for more exposed firms - which relied more on external finance - relative to other firms.

Redistributive effects of monetary policy on labor income

October 26, 2021

In recent years, inequality has attracted a great deal of attention in monetary policy circles. A growing strand of the macroeconomic literature suggests that monetary policy is not immune to redistributive consequences, despite inequality not being an explicit target of its actions. The bulk of this debate centers around the relationship between monetary policy and asset prices, yet labor income represents a major source of inequality, and its relationship with monetary policy remains unexplored.

Product market decisions and product quality in the wine industry when financial constraints hit

November 4, 2020

Barriers in access to finance (i.e., financial constraints) have been shown to affect real decisions of companies such as innovation, investment in fixed capital, and employment. This paper studies whether financial frictions affect one of the most central corporate decisions – which products to produce (i.e., product mix). The hypothesis is that firms adjust their product mix in order to generate cash flows faster. As different products have different production cycles and generate cash-flow at different points in time, companies may adjust their product mix in order to shorten the cash-flow maturity.

The impact of minimum wage policies in financially distressed firms

September 19, 2020

The Portuguese government promised to increase the minimum wage to 750 euros by 2023. If this goal is achieved, between 2014 and 2023 the nominal minimum wage will have increased 55%. The final objective of this measure is to reduce poverty and income inequality. However, it implies additional costs to firms and customers. When many firms are already under pressure and living in a context of high uncertainty due to the covid-19 pandemic, the announced minimum wage increases cast further doubts on the evolution of employment and on the financial condition of firms.