How Do Capital Requirements Affect the Performance of the Real Sector? Microevidence from Selected EU Countries

I analyze the response of small versus large firms to capital regulations in the banking sector. I study how this response varies with firms' dependence on external finance as well as their age using an annual firm-level dataset containing information on more than half a million public and private firms in selected EU countries. The results reveal statistically significant effects of changes in banking capital position on real sales growth of small and medium firms while large firms are not affected. They also indicate that a change in banking sector capital position has a stronger impact on firms in industries with higher dependence on external finance. Another major finding is that small and medium firms depend much more on the external finance in their earlier ages.

Financial Development, Dependence on External Finance and Firm-Level Volatility in Industrial Sector

Theoretical and empirical literature so far failed to establish a robust link between the financial development and output volatility at the firm level. I test the theoretical predictions of a general equilibrium model of financial development, risk-taking, risk-diversification and firm-level volatility. I find a significant positive effect of financial development on firm-level volatility confirming the relationship predicted by the model. This result stands in sharp contrasts to a number of previous studies reporting a negative relationship between the financial development and volatility at the firm level. Furthermore, the effect is stronger for firms in industries that are relatively more dependent on external finance. These results imply that firms requiring more external funds due to technological characteristics of the industry would chose higher risk-taking strategies in countries that are more financially developed. The results are very robust to the choice of different estimation methods controlling for potential outliers and alternative measures of financial development.