Financial constraint and output pricing: the case of international sanctions against Iran

Figures & data

Figure 1. Macroeconomic and financial indicators during the sanctions.

Source: WDI, Central Bank of Iran.

Table 1. Descriptive statistics of the variables during the period 2007q3-2018q1.

Symbol	Variable	N	Mean	Std. Dev.	Median
${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$	price growth of Product i of firm j in time t (%)	30,560	6.73	22.2	1.97
$\mathit{S}{g}_{\mathit{i},\mathit{j},\mathit{t}}$	Annual sale Growth	19,678	0.13	0.77	−0.01
$\mathit{F}{C}_{\mathit{j},\mathit{t}}$	WW Financial Constraint index	7355	28.80	29.88	21.05
$\mathit{In}{v}_{\mathit{j},\mathit{t}}$	Change in the inventory (of finished goods) to sale of firm	7353	0.87	27.17	0.00
$\mathit{M}{S}_{\mathit{j},\mathit{t}}$	Market Share	4849	0.10	0.23	0.00
$\mathit{N}{C}_{\mathit{j},\mathit{t}}$	number of creditors	6050	1.31	1.42	0.97
$\mathit{Di}{v}_{\mathit{j},\mathit{t}}$	Dividend ratio	7219	57.71	84.52	61.36
$\mathit{fcos}{t}_{\mathit{j},\mathit{t}}$	financial cost to Cashflow ratio	5006	0.27	0.84	0.14
$\mathit{Ex}{p}_{\mathit{j},\mathit{t}}$	Export Intensity Ratio	7173	10.25	17.30	2.16
$\mathit{Im}{p}_{\mathit{j},\mathit{t}}$	import Intensity Ratio	7112	22.08	24.32	13.25

Table 2. Financial constraint effect on firms’ price setting behavior during the imposition of sanctions.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)		(4)	(5)	(6)
FCj,t-1	−0.070**	−0.066**		−0.0043	−0.11***	−0.90***
FCj,t-1*Sanc	−0.063***	−0.068***		−0.074**	−0.042***	−0.21***
FCj,2011q4							−3.27
FCj,2011q4*Sanc							−0.093***
Sgj,t-1	0.00017***	0.00017***		0.00033***		−0.0033	0.00016***
Invi,j,t-1	−1.58	−1.73		−0.33		4.26	−1.22
MSj,t-1	5.15***	4.64***		5.14		0.74	3.64**
Ind_pgk,t-1	6.65	10.5*		12.0**		56**	6.39
TFP j,t-1		−0.91
Sanc				11.3***
Constant	43.5**	10.2***		30.6	15.7***	−39.1	−1.88
firm fixed effect	Yes	Yes	No		Yes	Yes	Yes
time fixed effect	Yes	Yes	Yes		Yes	Yes	Yes
data frequency	Quarterly	Quarterly	Quarterly		Quarterly	Annually	Quarterly
Observations	8994	7985	8994		17,274	3257	7157
R^2	0.337	0.352	0.201		0.362	0.483	0.322

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). The sample period is 2011q1 to 2018q1 and the sanction dummy variable (Sanc) equals 1 between 2012q1-2013q4 and 0 otherwise. * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 3. Role of export orientation and import dependency after the sanction imposition.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)	(4)	(5)
FCj,t-1	−0.079	−0.024	−0.35***	0.033	−0.058**
FCj,t-1*Sanc	−0.15***	−0.10***	−0.039	−0.033	−0.047*
FCj,t-1*Sanc*Expj,2011q4					−0.16**
FCj,t-1*Sanc*IMPj,2011q4					0.047
Sgj,t-1	−0.16	−0.00023	0.14	0.13	−0.000071
Invi,j,t-1	−4.91**	−1.05	−2.39	0.44	−1.57
MSj,t-1	−11.2***	−1.81	−0.41	1.04	−2.74*
Ind_pgk,t-1	−10.9	−11.9	−12.4	−3.37	−8.14
Constant	13.5***	19.1**	47.4***	−7.10	6.59
Subsample	Expj,2011q4 > 0 & Impj,2011q4 = 0	Expj,2011q4 > 0 & Impj,2011q4 > 0	Expj,2011q4 = 0 & Impj,2011q4 = 0	Expj,2011q4 = 0 & Impj,2011q4 > 0	All sample
firm fixed effect	Yes	Yes	Yes	Yes	Yes
time fixed effect	Yes	Yes	Yes	Yes	Yes
data frequency	quarterly	quarterly	quarterly	Quarterly	Quarterly
Observations	2702	5010	1462	1561	9938
R^2	0.213	0.189	0.361	0.090	0.186

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), and industry-level price growth corresponding to firm j (Ind_pg). In the first four estimations, equation (1)(1) ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}=\mathit{\lambda F}{C}_{\mathit{j},\mathit{t}-1}+\mathit{\gamma F}{C}_{\mathit{j},\mathit{t}-1}\ast \mathit{Sanc}+\mathit{S}{g}_{\mathit{i},\mathit{j},\mathit{t}-1}+\mathit{\theta }{X}_{\mathit{j},\mathit{t}}+{\mu }_t+{\delta }_j+{\epsilon }_{\mathit{i},\mathit{j},\mathit{t}}$(1) is estimated for subsamples divided by export orientation EXPi,t (ratio of export income to total income) and import dependency index IMPi,t (ratio of imported input to cost of goods sold). * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 4. Ownership structure and pricing behavior after the sanction imposition.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)	(4)
FCj,t-1	−0.082	−0.069*	−0.060	−0.073
FCj,t-1*Sanc	−0.098***	−0.019	−0.063***	−0.17
Sgi,j,t-1	0.00012***	0.0073***	0.00018***	−0.044
Invi,j,t-1	0.067	−3.6***	−1.2	−2.7***
MSj,t-1	4.8*	2.2	5.4***	−4.1
Ind_pgk,t-1	11.6	−0.40	6.7	0.88
Constant	46.7**	9.9***	44.2**	10.4***
Subsample	Directly owned by the government	Directly not related to the government	Directly or indirectly owned by the government	Not related to the government
firm fixed effect	Yes	Yes	Yes	Yes
time fixed effect	Yes	Yes	Yes	Yes
data frequency	quarterly	Quarterly	Quarterly	Quarterly
Observations	2057	6943	7510	1490
R^2	0.504	0.226	0.336	0.390

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 5. Different proxies for financial constraint measure.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)	(4)	(5)	(6)
FCj,t-1	0.015	0.30	0.12	−7.44	−0.4	0.004
FCj,t-1*Sanc	0.13*	−1.51*	−0.87***	−20.4*	−0.20**	−0.061***
Sgj,t-1	−0.013	0.00017***	0. 00016***	−0.000017**	0.00014***	0.00016***
Invi,j,t-1	−10.6*	−1.84	−1.6	25.4	−1.74	−1.67
MSj,t-1	−4.72	4.99**	5.2***	−69.3	5.39***	5.16***
Ind_pgk,t-1	−16.1**	7.63	5.9	−5.44	9.33	5.67
Constant	39.1***	45.7**	43.1**	−77.6	42.5**	43.7**
Financial Constraint proxy	Dividend payout ratio	Nickell and Nicolitsas (1999) index	deciles of WW index	Dividend payout ratio	Nickell and Nicolitsas (1999) index	deciles of WW index
Estimation method	OLS	OLS	OLS	IV regression	IV regression	IV regression
firm fixed effect	Yes	Yes	Yes	Yes	Yes	Yes
time fixed effect	Yes	Yes	Yes	Yes	Yes	Yes
data frequency	Annually	quarterly	Quarterly	Annually	quarterly	Quarterly
Observations	3378	8023	8994	7701	7471	8994
R^2	0.470	0.354	0.333	0.381	0.261	0.336

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). The estimations include different proxies for financial constraints. Dividend Payout ratio, Nickell and Nicolitsas (1999) index (interest payment ratio), and deciles of WW index are used in columns (1) to (3) respectively. * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 6. Estimation results with different estimation periods and the sanction dummy variable.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)
FCj,t-1	−0.26**	−0.038	−0.070**
FCj,t-1*Sanc	−0.083**	−0.067***	−0.076***
Sgj,t-1	−0.0024	0.00016***	0.00016***
Invi,j,t-1	−0.28	−1.9	−1.6
MSj,t-1	4.1**	5.1***	5.0***
Ind_pgk,t-1	−1.9**	7.6	5.7
Constant	3.4***	4.3**	4.3**
estimation period	2011q1-2015q1	2007q3-2018q1	2011q1-2018q1
effective period of sanction	2012q1-2013q4	2012q1-2013q4	2012q2-2014q1
firm fixed effect	Yes	Yes	Yes
time fixed effect	Yes	Yes	Yes
data frequency	Quarterly	Quarterly	Quarterly
Observations	2380	9559	9000
R^2	0.434	0.327	0.338

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 7. Considering the imbalance of the panel data in the estimations.

	Dependent variable: ${\pi }_{\mathit{i},\mathit{j},\mathit{t}}$
	(1)	(2)	(3)
FCj,t-1	−0.041	−0.036	−0.042
FCj,t-1*Sanc	−0.076***	−0.078***	−0.081***
Sgj,t-1	0.0075	0.0048**	0.0035*
Invi,j,t-1	−2.8	−1.9	−1.3
MSj,t-1	4.1**	2.5	3.0
Ind_pgk,t-1	9.8*	11.3*	15.5**
Constant	38.1**	11.4**	13.0***
Min. N. of Obs. In each panel unit	10	20	27
firm fixed effect	yes	yes	yes
time fixed effect	yes	yes	yes
data frequency	quarterly	quarterly	Quarterly
Observations	6670	4897	3996
R^2	0.314	0.278	0.300

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Table 8. Cumulative effect on output price after the sanction imposition.

Dependent variable: $\mathrm{\Delta }{p}_{\mathit{i},\mathit{j},\mathit{t},\mathit{t}-8}$=$log{p}_{\mathit{i},\mathit{j},\mathit{t}}-log{p}_{\mathit{i},\mathit{j},\mathit{t}-8}$
	(1)	(2)	(3)	(4)
FCj,t-8	−0.18***		−0.22***
FCj,2011q4		−0.26***		−0.32***
Sgj,t-8			0.28**	0.47***
Invi,j,t-8			−02.0***	0.92
MSj,t-8			−4.8	−16
Ind_pgk,t-8			−7.6**	−9.5**
Constant	−4.3	−3.6	1.17.1***	126***
firm fixed effect	Yes	yes	yes	yes
time fixed effect	Yes	yes	yes	yes
data frequency	quarterly	Quarterly	quarterly	Quarterly
Observations	2003	1608	818	653
R^2	0.182	0.185	0.255	0.268

Note. The dependent variable is the price growth of good i (produced by firm j) in time t. Also, explanatory variables are financial constraint index (FC), sales growth (Sg), inventory change to sale ratio (Inv), market share (MS), total factor productivity (TFP), and industry-level price growth corresponding to firm j (Ind_pg). * p < 0.10, ** p < 0.05, *** p < 0.01; the standard errors are clustered by firm.

Nickell, S., & Nicolitsas, D. (1999). How does financial pressure affect firms? European Economic Review, 43(8), 1435–1456.

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