PERFORMANCE: Finance, Constraints to Growth, Bankruptcy and Employment Dynamics


To assess, from an empirical perspective, the extent to which the financial structure of European business firms has any impact (and if so how) on their performance and competitiveness both in old and new EU countries.

These main questions are addressed:

  • How does the financial structure of European business firms change across different regions and industries?
  • How do different financial profiles map into different streams of investment, profitability, productivity rates? How do they impact on the probability of defaulting?
  • Are there any financial or liquidity constraints to firm growth?
  • How do growth dynamics reflect into different dynamics of gross and net job flows?
  • Do privatisation means in transition countries affect the growth prospects and/or probability of defaulting?

Description of work

Work Package 4 aims to investigate the impact of firm financial conditions on the co-evolving dynamics of firm profitability, productivity, and growth of European business firms. Together it will analyze the underlying causes leading European business companies to financial distress and, possibly, to defaulting.

Dynamics of Financial Conditions

The first task aims to provide a statistical investigation, from a comparative perspective, of the status and the dynamics of firm financial structures. Using available data on European business companies, our goal is to assess how (and why) the financial profile of a firm (as to liquidity, solvency, debt, fragility, etc.) changes according to firm size and age, country and industrial sector.

Financial Conditions, Efficiency, Profitability, and Growth

The second task is to address, from a statistical and econometric perspective, the relationships between firm financial status and firm performance. In particular this task investigates the relationship between growth, production efficiency and profitability of firms and their financial health, and addresses the following two issues:

  • What is the relationship between firm financial structures and firm investment dynamics?
  • How does firm financial structure affect the future stream of firm growth rates?

Financial Distress and Corporate Performance

The final task concerns the empirical study of the most extreme situation of financial distress, which is the formal declaration of default. It is intended to explore this issue along the following complementary directions:

  1. Firstly, the research will attempt to do some exploratory analysis about how financial conditions production profile of defaulting firms has evolved in years immediately preceding formal declaration of default.
  2. Secondly, it will turn to the issue of major interest in this Work Package, namely the economic performance of defaulting firms. In line with Task 1 and Task 2, the research will describe how defaulting firms behave in terms of growth, productive efficiency and profitability in the period of time preceding the declaration of default, and what the main determinants of bankruptcy are.
  3. Finally, work is expected to shed light on the issue of economic transformation in CEE countries. More specifically, this task aims to improve our understanding of whether privatisation policies, in absence of proper institutional environment, have led to an adverse selection device that can turn potential winner firms into losers.

Work Package leader: Giovanni Dosi, Sant'Anna School of Advanced Studies

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