World of Work Report 2013 - International Labour Organization

explanatory variables used were as follows: CAPEX, describes the ratio of capital
investments; INV, measures inventories; DIV, describes dividend payments; ROA,
measures profits; LEV, the total debt; CF, cash flows; and RD, research and development
expenditures. The following variables are not expressed as a fraction of
total assets: EMP, employees (in thousands); IPOd, a dummy that equals 1 if the
fi r m’s I P O t o o k p l a c e a t m o sfi t ve years ago; MTB, the market-to-book ratio; risk_
idio, measures the standard deviation of a fi rm’s Solow-residual net of aggregate
effects – the Solow residual is computed with a production-function estimation
technique, where total labour and total assets are used as inputs; risk_industry,
captures annual means of the idiosyncratic risk within two-digit industries; risk_
agg, describes the standard deviation of GDP growth rate by country; std_CF, the
standard deviation of a fi rm’s cash flows; and fi n_cstr, a dummy that equals 1 if a
fi r m i sfi n a n c i a l l y c o n s t r a i n e d .
Financial constraints
Much of the existing literature on corporate liquidity treats a fi rm as fi nancially
constrained if it is not paying dividends.40 The rationale is that, because of the
limits to external fi nancing, a firm benefits from retaining funds within the fi rm.
Thus, the fi rm does not pay out dividends. However, a non-dividend paying fi rm
is not necessarily constrained as high-growth fi rms also tend to pay no or low
dividends as long as they have sufficient investment opportunities available. As
such, firms for this analysis are considered fi nancially constrained if the dividends
(DIV) and the return on assets (ROA) are non-positive.
This quantitative measure of financial constraint discriminates very well
between fi rms in fi nancial distress and unconstrained fi rms: the variable fi n_cstr
is significantly correlated with fi rms’ leverage (LEV) and the effective interest rate
(EIR). Furthermore, the OLS results emphasize the differences between fi nancially
unconstrained and constrained fi rms. A fi nancially constrained fi rm exhibits
a much higher sensitivity to cash with respect to business risks, cash flows and
changes in inventories. This implies that these factors are perceived as substitutes
for cash. This constitutes an important robustness check and increases the confidence
that the indicator variable is able to capture the presence of fi nancial distress.
Furthermore, a non-linear relationship between leverage and the effective
interest rate emerges. Higher leverage ratios are generally related to lower interest
payments in the data. Only when the leverage ratio (LEV) reaches 95 per cent of
total assets do interest rates (EIR) start to increase again, as banks start to regard
the high debt-to-equity ratio as problematic and charge higher premiums for the
increased probability of default.
Economic risks
The extent of risk affects fi rms’ determinations of the appropriate levels of liquid
assets to hold. In particular, higher levels of risk render any forecasts about the
future economic environment less precise, and thereby introduce a motive to hold
higher precautionary levels of liquidity.41 Firms also encounter risky environments
40. See, for example, Baum et al. (2006).
41. See, for example, Bloom et al. (2007) and Bloom (2009).
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4. Investment for a job-friendly recovery