Does a firm’s access to external finance matter for its performance?

ABSTRACT

This paper explores the role of a firms financial condition in determining a firms performance from 2008 to 2017 based on Korean firm-level data. We define the financial condition of a firm as measuring the firms need to access external financing and examine whether firms with a higher demand for external finance grow faster or slower than the other firms. We also examine to what extent the provision of loans to firms can promote the growth of those is in need of external financing. Our empirical analysis shows that the financial condition of a firm appears to be significant in deciding the firm's growth, by showing that firms that are short in internal cash flows tend to grow more slowly than those are not. However, provision of loans to those firms can mitigate the negative effects of financial condition on growth significantly. Those empirical results reaffirm the findings in the existing literature at the firm level and suggest that an appropriate supply of loans may be crucial for firms growth in an economy.

KEYWORDS:

• Dependence on external financing
• bank lending
• financial constraints
• firm growth

JEL CODES:

• G20
• G30
• O16

Disclosure statement

No potential conflict of interest was reported by the author.