Is Bigger Always Better ? The Effect of Size on Defaults

Exploiting a large database of Italian manufacturing firms we investigate the relationships between default rate and firm size. Default events, defined as conditions of actual or likely insolvency, are a signal of deep business troubles. They are unanticipated, costly and dangerous for the firm as well as for the economy, and should be in principle avoided. Our evidence, based on data provided by a large Italian banking group, reveals that the default probability of firms increases with their size. This finding contrasts with typical results on exit events based on business registries data, and suggests to revise the common wisdom that sees the core of the industry as a safe place and its members as most valuable economic assets.firm default and exit, firm size,bootstrap probit regressions.

The Evolution of the World Trade and the Italian ‘Anomaly’: A New Look

This work provides an empirical assessment of the âsophisticationâ of the Italian international specialization pattern and of its evolution during the period 1980−2000. In particular we discuss the Italian âanomalyâ, i.e. the evidence that Italy displays a specialization pattern more similar to the one of emerging economies than to the one of countries of comparable level of per-capita income. We show that combining the information coming from a new index measuring the income/productivity content of traded goods, i.e. the PRODY index recently proposed in Hausmann et al. (2005), with the index of Revealed Comparative Advantages (RCA) can shed light on the Italian anomaly. We begin providing a detailed picture of the theoretical and empirical characteristics of the PRODY index. In particular we calculate the index for 1980, 1990 and 2000 mapping its dynamics through that period. Then we describe the characteristic and evolution of the Italian RCA using both parametric and non parametric techniques finding that the Italian pattern of specialization is particularly persistent. Finally, we describe the co-evolution of the PRODY and of the RCA indexes. Our analysis shows that in the last two decades, the world trade has been rapidly changing with Italy becoming increasingly more competitive and specialized in products that are characterized by decreasing income/productivity levels. Thus, while the Italian âanomalyâ was not a problem in the past, it may have become an obstacle to future growth.Specialization pattern, RCA, PRODY index, Italian ’anomaly’

The evolution of world trade and the Italian ‘anomaly': a new look

This work provides an empirical assessment of the 'sophistication' of the Italian international specialization pattern and of its evolution during the period 1980 � 2000. In particular we analyse the well-known Italian trade 'anomaly' combining the information coming from the PRODY index (Hausmann et al. (2005)) with the RCA index. Our results show that in the last two decades, the world trade has been rapidly changing with Italy becoming increasingly more competitive and specialized in products that are characterized by decreasing income/productivity levels. Thus, while the Italian 'anomaly' was not a problem in the past, it may have become an obstacle to future growth.PRODY index,RCA,Specialization pattern

Productivity, Profitability and Financial Fragility: Evidence from Italian Business Firms

In this work we investigate two crucial dimensions of firms’ structure and dynamics, that is profitability and productivity performance. The empirical distributions and the associated persistence over time are explored through a set of parametric and non parametric exercises performed on an large panel of Italian firms active in both Manufacturing and Services during the period 1998-2003. The main contribution resides in the use of an index of financial risk which allows us to document that not obvious interactions are in place among economic performances, financial conditions and availability of external credit. We also offer an initial understanding about how profitability and productivity relate with a third dimension of performance, that is firm growth. We find that, independently from the particular sector of activity and from financial conditions, there seems to be little market pressure and little behavioral inclination for the more efficient and more profitable firms to grow faster.Firm performance, Profitability, Productivity, Financial constraints

Growth Processes of Italian Manufacturing Firms

This paper presents a multidimensional empirical analysis of firm growth. Exploiting census data on Italian manufacturing firms, 1989-1997, we estimate a reduced-form VAR to analyze the co-evolution of employment growth, sales growth, growth of profits and labour productivity growth. Our main findings suggest that (i) employment growth precedes sales growth; (ii) productivity growth lacks any strong association with subsequent growth of the other indicators; (iii) profits growth represents the `absorbing dimension' of the growth processes. This picture contrasts with 'accelerator models', predicting sales are the driver of the growth process, and is also at odds with theories of firm-industry evolution assuming productivity or profits advantages to be the driver of strong market selection/reallocation mechanisms. Instead, the findings reveal the existence of (weak) Penrose and (strong) Kaldor-Verdoorn effects, and more generally convey the view that employment growth is the key driver of firm expansion, while profits, once made, are not reinvested.Household Consumption Expenditure, Budget Shares, Sum of Log-Normal Distributions

Exporting under financial constraints: margins, switching dynamics and prices

Using data on cross border transactions together with an informative measure of financing constraints this paper provides new evidence that limited access to external capital narrows the scale of foreign sales, the exporters? product scope and the number of trade partners. It shows that constrained firms have a reduced probability of adding and a higher probability of dropping products and destinations. Further it documents that constrained firms sell their products at higher prices as compared to unconstrained firms. All the results are robust to specific control for unobserved heterogeneity, self-selection into export and potential endogeneity of the financial constraints proxyfinancial constraints, margins of export, export prices

Financial Fragility and Growth Dynamics of Italian Business Firms

This work explores a number of properties investigated in the empirical literature on firm size and growth dynamics: (i) the distribution and the autoregressive structure of firm size; (ii) the existence of size-growth scaling relationships; (iii) the distribution and the autoregressive structure of scaling-free growth rates. The major novelty concerns our exploiting of a credit rating index to condition all the analyses upon firms' financial fragility and access to credit. We find that the distributions of both firm size and firm growth rates are fatter tailed among less solvable firms than in the rest of the sample, both at the bottom and at the top extreme of the distributions. As a result, we conclude that not only small and/or slowly growing firms might suffer from difficulties in raising external financing, but also big and fast growing ones might be exposed to financial constraints.Firm size, Firm growth, Financial constraints

Financial and economic determinants of firm default

This paper investigates the relevance of financial and economic variables as determinants of firm defaults. Our analysis is not limited to publicly traded companies but extends to a large sample of limited liability firms. We consider size, growth, profitability and productivity together with a standard set of financial indicators. Non parametric tests allow to asses to what extent defaulting firms differ from the non-defaulting group. Bootstrap probit regressions confirm that economic variables play both a long and short term effect. Our findings are robust with respect to the inclusion of Distance to Deafult and risk ratings among the regressors.firm default, financial indicators, selection and growth dynamics, kernel densities, stochastic equality, bootstrap probit regressions, distance to default

Export activities under financial constraints: Margins, quantities and prices

This paper provides a comprehensive analysis of the role that financial constraints play in shaping firms' export activities. We use custom information on cross borders transactions for Italian firms, together with an informative measure of financing constraints based on an official credit rating issued by an independent institution. Controlling for potential selection bias our results confirm that limited access to external capital narrows the scale of foreign sales, the exporters' product scope and the number of trade partners. We enrich previous analyses showing that financial problems influence firms' strategies of switching among products or destinations, and also affect firms' pricing decisions. Constrained firms have a reduced probability of adding new products or destinations and a higher probability of dropping products or destinations. Moreover, they attempt to offset, via higher prices, the negative impact on foreign revenues induced by the decreased physical quantity associated with financial constraints

What does (or does not) determine persistent corporate high-growth

Theoretical and empirical studies of industry dynamics have extensively focused on the process of growth. Theory predicts that production efficiency, profitability and financial status are central channels through which some firms can survive, grow and eventually achieve outstanding growth performance. Is the same conceptual framework a convincing explanation to account for persistent corporate high growth? Exploiting panels of Italian, Spanish, and French firms we find no evidence that this is the case: companies experiencing persistent high growth are not more productive nor more profitable, and do not display peculiarly sounder financial conditions than firms that only exhibit high, but not persistent, growth performance. The finding is robust across countries, across sectors displaying different innov ation patterns, and also controlling for demographic characteristics such as age and size