Essays on firm behaviour in the euro area

This thesis examines firms' real decisions using a large panel of unquoted euro area firms over the period 2003-2011. To this end, this thesis is composed of five chapters in which three are the main empirical chapters. They assess the dimensions of firm behaviour across different specifications. Each of these chapters provide a detailed discussion on the contribution, theoretical and empirical background as well as the panel data techniques which are implemented. Chapter 1 describes the introduction and outline of the thesis. Chapter 2 presents an empirical analysis on the link between financial pressure and firms' employment level. In this set-up, it is explored the strength of financial pressure during the financial crisis. It is also tested whether this effect has a different impact for financially constrained and unconstrained firms in the periphery and non-periphery regions. The results of this chapter denote that financial pressure exerts a negative impact on firms' employment decisions and that this effect is stronger during the crisis for financially constrained firms in the periphery. Chapter 3 analyses the cash policies of private and public firms. Controlling for firm size and other standard variables in the literature of cash holdings, empirical findings suggest that private firms hold higher cash reserves than their public counterparts indicating a greater precautionary demand for cash by the former. The relative difference between these two type of firms decreases (increases) the higher (lower) is the the level of financial pressure. The findings are robust to various model specifications and over different sub-samples. Overall, this chapter shows the relevance of firms' size. Taken together, the findings of Chapter 3 are in line with the early literature on cash holdings and contradict the recent studies, which find that the precautionary motive to hold cash is less pronounced for private firms than for public ones. Chapter 4 undertakes an investigation on the relation between firms' stocks of inventories and trade credit (i.e. extended and taken) whilst controlling for the firms' size, the characteristics of the goods transacted, the recent financial crisis and the development of the banking system. The main findings provide evidence of a trade-off between trade credit extended and firms' stock of inventories. In other words, firms' prefer to extend credit in the form of stocks to their financially constrained customers to avoid holdings costly inventories and to increase their sales levels. The provision of trade credit by the firms also depends on the characteristics of the goods transacted. This impact is stronger during the crisis. Larger and liquid banking systems reduce the trade-off between the volume of stocks of inventories and the amount sold on credit. Trade credit taken is not affected by firms' stock of inventories. Chapter 5 presents the conclusions of the thesis. It provides the main contributions, implications and future research of each empirical chapter.