Capital-structure-and-growth-of-the-firms-in-the-b

AppliedFinancialEconomics,2008,18,821–833CapitalstructureandgrowthofthefirmsinthebackwardregionsofthesouthItalyDomenicoSarnoDepartimentofLawandEconomics,SecondaUniversita`diNapoli,ItalyE-mail:[e-mail]thatthegrowthofsouthernItalianfirmsisfinancedmostlybyinternalfinance,sinceexternalfinancingismoreproblematicandcostly.Hencefirmgrowthissubjecttofinancialconstraints.Theeconomicsoffinancialconstraintsdealswiththerelationshipoffinancialstructuretofirmgrowth.Consequently,the‘financialgrowthcycle’isusedtoanalysethefeaturesofthecapitalstructureoftheMezzogiorno’sSMEscomparedtoItaly-wideSMEs.Thegrowth-cashflownexusisthenempiricallyanalysedbyusingtheGibratgrowthmodelenrichedbythecashflowvariable.I.IntroductionTheaimofthisarticleistoshowthatthegrowthofsouthernItalianfirmscomparedtothoseinItaly’sotherregionsisfinancedmostlybyinternalresources.Theintensiveuseofinternalfinanceminimizesgrowthcostssinceinternalresourcescostlessthanexternalresources.Thisisduetothefactthataccesstofinancialmarketsandprovisionofexternalresourcesaremoreproblematic.Naturally,thedependenceofgrowthoninternalfinanceincreasestheprobabilityofbottlenecksinthefinancialflow,andfirmgrowthisthereforelikelytobefinanciallyconstrained.Theeconomicsoffinancialconstraintsisaverybroadtheoreticalandempiricalfieldofresearch.ItisdevelopedontheModigliani–Miller(MM)theoremandsetsouttoevaluatewhetherthegrowthoffirmsisindependentoftheircapitalstructureoffirms.Infact,empiricalanalysishasoftenrejectedtheMMpropositionsandhasconfirmedthepeckingorderhypothesisaccordingtowhichgrowthissignificantlyfinancedbyinternalfinance.Empiricalverificationofthecorrelationbetweengrowthasmeasuredbyinvestmentandinternalresourcesisusedtoprovetheexistenceoffinancialconstraints.Thismeansthatfirmgrowthisconfinedbyitsowncapacitytogenerateresourcessufficientlytofinanceit.Thisconclusioniscalledintoquestionastherelationshipbetweeninvestmentandinternalfinancecouldsuggestinvestmentopportunitiesonthepartofthefirmratherthantheoperatingoffinancialconstraints.Hence,empiricalanalysiscre-atessubgroupsaccordingtoavariablewhichshoulddiscriminatebetweenfinanciallyandnonfinanciallyconstrainedfirms.ThroughthisapproachthequestionsconcerningthefinancingofsouthernItalianSMEgrowthareanalysed.Insteadofthetraditionalonebasedontheestimationoftheinvestment-TobinqfunctionorthetestoftherestrictionsposedbytheinvestmentEulerequation,theempiricalgrowthmodeloftheGibratlawisusedtoassesstheimportanceofinternalfinancetogrowth.Inthiscase,Gibrat’smodelisenrichedbyintroducingthecashflowvariabletoconfirmthatthecontributionofinternalfinancetogrowthisgreaterinfirmsinsouthernItaly.Thiswouldappeartovalidatethefinancialconstraintsthesisratherthantheinvestmentopportunitiesthesisgiventhedisadvantageofsouthernfirms.AppliedFinancialEconomicsISSN0960–3107print/ISSN1466–4305online
2008Taylor&Francis821:10.1080/09603100701222309ThisconclusionbegsaseriesofquestionsrelatedtoaccesstofinancialmarketsandtheeffectsproducedbythereorganizationofthebankingsysteminsouthernItalyintermsofregionalgrowthfinancing.Itiswellknownthatinthe1990stheeconomyofsouthernItalywasaffectedbyconsiderablechanges.ThespecialregimeforinterventioninfavourofsouthernregionsceasedatthesametimeasthefinancialcrisesandtheexitfromEuropeanMonetarySystem.Thisforcedfirmstocompeteandthedifficultiesindealingwithincreasingcompetitionforcedfirmstowardsdownsizing;concurrently,theshadowsectorincreaseddramatically.Atthesametime,theregionalcreditsystemisaffectedbyalargerestructuringprocess.Thisisworsenedbytheliberal-izationoffinancialmarketsandconsequentlytradepenetrationinthesouthernregionsbylargerexternalbanksisincreasing.Thisprocesswillleadtoacompletedislocationoftheregionalbankingsystemtowardsaseriesofacquisitionsandmergersofregionalbanksbyexternalbanks.1Asfortheeffectsofthismajorchange,therearenowafewempiricalresultsthatshowthatthisprocesshasincreasedbankperformance(Panetta,2004),butalsogeneratedatemporarylossofthecreditsupplytolocalfirms(MattesiniandMessori,2004;BonginiandFerri,2005).OtherworksprovidesimilarconclusionsshowingaincreaseincreditrationingintheItalianMezzogiorno(Becchettietal.,2005).Theremainderofthearticleisorganisedasfollows.SectionIIdealswiththeliteratureonfinancialconstraintstofirmgrowthwhileSectionIIIcoverspointsregardingthefinancialstructureofsmallfirms.InSectionIVthecharacteristicsofthedata-setareexpounded.ThefinancialstructureofsouthernfirmswillthenbecomparedwiththatofotherItalianfirms(SectionV).SectionVIpresentsthemodelandtheresultsofempiricalanalysisinordertotestthesignificanceofthegrowth-cashflownexusinthesampleofItalianSMEsandtheimportanceoftheadditionalcontributionofinternalfinancetothegrowthofsouthernItalianSMEs.Finally,somebriefconclusionsaredrawn.II.FinancialConstraints,InvestmentandFirmGrowthIntheconventionalframeworkoffirmgrowthanalysisthequestionrelatedtofinancingofgrowthisanalysedbyinvestigatinggrowth-size-profitabilityrelationships(e.g.Storeyetal.,1987).Thecrucialfunctionperformedbythepr