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The Consequences of Corporate Liquidity Constraints - Theory and Evidence from Morocco

English title The Consequences of Corporate Liquidity Constraints - Theory and Evidence from Morocco
Applicant Benhima Kenza
Number 197701
Funding scheme Project funding (Div. I-III)
Research institution Department of Economics (DEEP) Faculty of Business and Economics (HEC) University of Lausanne
Institution of higher education University of Lausanne - LA
Main discipline Economics
Start/End 01.11.2020 - 31.10.2022
Approved amount 172'099.00
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Keywords (5)

Financial frictions; Financial accelerator; Credit guarantees; Liquidity needs; Misallocations

Lay Summary (French)

Lead
Le manque d'accès des entreprises aux financements extérieurs est un obstacle au développement des pays émergents. Si ce fait est bien établi au niveau macroéconomique, il existe étonnamment peu de preuves empiriques utilisant des données au niveau des entreprises des pays émergents. Cela peut s'expliquer par le manque de données. Ce projet comble cette lacune en utilisant un ensemble de données original au niveau des entreprises marocaines.Dans ce projet, nous étudierons en particulier le financement à court terme des entreprises. Nous en étudierons les conséquences sur les entreprises elles-mêmes, mais aussi sur l'économie dans son ensemble, en termes d'efficacité et de résilience aux chocs macroéconomiques.
Lay summary
Le projet se concentre sur un type de financement particulier : le financement à court terme. Les sources de financement à court terme sont les prêts à court terme, les lignes de crédit et les crédits commerciaux. Les entreprises les utilisent pour faire face aux chocs de liquidité inhérents au processus de production. Ce type de financement est sous-étudié dans les pays émergents, car la littérature se concentre généralement sur le financement "générique". Pourtant, il est d'une importance de premier ordre et est essentiel au développement et à la survie des entreprises.
Nous estimerons tout d'abord l'effet d'un programme de garantie de crédit conçu pour améliorer l'accès des entreprises aux liquidités externes sous forme de lignes de crédit. Nous nous concentrerons sur la gestion des liquidités des entreprises et sur les résultats réels : croissance, taux de survie, investissement, emplois.
Nous étudierons ensuite le "multiplicateur de crédit commercial". Nous nous concentrerons sur le rôle de la répartition du crédit commercial entre les entreprises dans l'amplification des chocs financiers.
Enfin, notre recherche portera sur le lien entre les chocs de liquidité et la mauvaise allocation des ressources entre entreprises. Les frictions financières, et en particulier l'accès aux liquidités, empêchent les entreprises de s'adapter rapidement aux chocs. Nous examinerons dans quelle mesure ce phénomène génère des pertes d'efficacité au niveau macroéconomique.
Les études menées dans le cadre de ce projet contribueront non seulement à la littérature en approfondissant la compréhension des contraintes financières, mais elles sont également d'une importance politique de premier ordre. L'accès des entreprises au financement est une question cruciale pour la plupart des économies avancées et émergentes, et nous espérons donc que les résultats de nos recherches trouveront un public au-delà des cercles universitaires. Cette question est devenue particulièrement pressante dans le contexte de la pandémie de Covid-19, qui prive actuellement les entreprises de liquidités dans le monde entier, et risque de devenir un risque récurrent. Il est essentiel de comprendre les canaux, en particulier lors de la conception des politiques.
Direct link to Lay Summary Last update: 27.10.2020

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Abstract

Firms’ lack of access to external finance is an impediment to development in emerging countries. While this fact is well established at the macro level, there is surprisingly scarce empirical evidence using firm-level data from emerging countries. This can be explained by the lack of micro level data. The first objective of this project is to fill this gap by using an original and comprehensive Moroccan firm-level dataset.The second objective of this project is to focus on a particular type of finance: short-term finance. Sources of short-term finance are short term loans, credit lines and trade credit. Firms use them to sail through liquidity shocks that are inherent to the production process. This topic is also under-studied in emerging countries, since the literature usually focuses on “generic” finance. Yet, it is of first-order importance and is key for firms’ development and survival. We argue that it also has first-order macro consequences. This issue has become even more pressing in the context of the Covid-19 pandemics, which is currently depriving firms of liquidity worldwide, and is likely to become a recurring risk. Understanding the channels is key, especially when designing policies.The first sub-project will estimate the effect of a credit guarantee program designed to improve firms’ access to external liquidity in the form of credit lines. We will focus on firms’ liquidity management and real outcomes: growth, survival rate, investment, labor. Our dataset will be composed of firm-level balance-sheet information from the Moroccan trade registry (OMPIC), provided by Bank-al-Maghrib (Morocco’s central bank) and of the universe of guarantees allocated by the Caisse Centrale de Garanties (CCG) for credit lines since 2012, when the program was launched. To identify the effect of the guarantees, we will exploit several quasi-natural experiments based on an eligibility threshold, limitation in guaranteed loan size and geographical coverage of CCG branches.The second sub-project will study the “trade credit multiplier”. We will focus on the role of the distribution of trade credit across firms in the amplification of financial shocks. Indeed, in Morocco, trade credit flows “uphill”: small firms are net creditors while large firms are net borrowers. We will investigate empirically what mechanisms drive this phenomenon and whether this asymmetry worsens or is alleviated during financial turmoil. Armed with our empirical results, we will build a model to quantify the trade credit multiplier.The third sub-project will focus on the link between liquidity shocks and misallocations. Financial frictions, and especially the access to liquidity, prevent firms from quickly adjusting to shocks. We make the conjecture that this mechanism explains part of aggregate misallocations when firms face idiosyncratic liquidity shocks. We will build a model to show the relationship between the volatility of idiosyncratic liquidity shocks and liquidity constraints on the one hand, and the cross-section dispersion in marginal returns and misallocations on the other hand. Using Moroccan data, we will quantify the role of financial frictions and test the predictions of our model.Our project is both empirical and theoretical. The theory will discipline the empirical exercises, and the empirical evidence will inform the models and policy experiments. In particular, the second and third sub-projects build models that are disciplined by the data. Using these models, we will be able to evaluate the impact of policy reforms on misallocations and the volatility of business cycles.This project will involve a doctoral student, Wenxia Tang, who will be in charge of cleaning the datasets and will contribute to the project. This project will enable her to be acquainted with to state-of-the -art models and empirical methods. Eventually, she will be able to design her own solo project, using the original dataset she will have built. A student-assistant will also be involved in setting up the final dataset. Finally, we plan to organize a workshop on financial frictions in developing countries. The purpose is to get together leading researchers in the field to present and discuss papers and to showcase the research conducted within the project.The studies conducted within this project will not only contribute to the literature by deepening the understanding of financial constraints, but they are also of first-order policy importance. Firms’ access to finance is a crucial question for most advanced and emerging economies, so we expect the results of our research to find an audience beyond the academic circles.
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