Volatility, financial constraints, and trade

Publication year: 2012
Source: International Review of Economics & Finance, Volume 21, Issue 1, January 2012, Pages 57-76

María, García-Vega , Alessandra, Guariglia , Marina-Eliza, Spaliara

We construct a dynamic monopolistic competition model with heterogeneous firms to study the links between firms’ earnings volatility, their degree of financial constraints, their survival probabilities, and their export market participation decisions. Our model predicts that more volatile firms are more likely to face financial constraints and to go bankrupt, need to be more productive to stay in the market, and have more incentives to start exporting. A further implication is that through market diversification, exports tend to stabilize firms’ total sales. These predictions are supported by our empirical tests, which are based on a panel of 23,674 UK firms.