World of Work Report 2013 - International Labour Organization

Other factors
In addition to economic uncertainty and fi nancial constraints, three other main
factors were identifi ed, namely: (i) future growth opportunities, (ii) postponed
investment and (iii) institutional factors. Future growth opportunities are measured
via a fi rm’s market-to-book ratio and its research and development expenditures.
Higher values in both cases indicate better expected future growth
opportunities. Postponed investment is measured through the OLS coefficient
of capital expenditures (as higher capital expenditures are associated with lower
cash holdings). Institutional factors measures the effect of dividends on cash
holdings.
Econometric model
The methodology involved using several different types of panel models. The
following discussion of results refers to the specification of the baseline setup
(pooled OLS). Table 4A.3 shows the results of the baseline regression with
liquidity (CASHEQ) as the dependent variable.
Discussion of results
The model shows that there is indeed a direct link between the observed increase
in the cash holdings of fi rms and the decline in real investment. The principal
reason for holding cash is attributed to existing financial constraints. In fact,
fi nancial constraints account for 42 per cent of the variation in cash holdings
(figure 4A.1).42 In this respect, the increase of liquidity is largely driven by underlying
fi nancial constraints which in turn depress investment. In fact, fi nancially
constrained firms are investing only half as much of their assets as unconstrained
fi r m s . I n a d d i t i o n ,fi n a n c i a l l y c o n s t r a i n e dfi r m s p a y a s i g n ifi cantly higher interest
rate on their debt (7.6 per cent) than non-constrained fi rms (5.3 per cent) and are
unable to take on as much debt.43 Moreover, the results indicate that fi rm size and
fi n a n c i a l c o n s t r a i nt s a r e c o r r e l a t e d : t h e s m a l l e r fi a r m i s , t h e m o r e l i k e l y i t i s t o f a c e
fi n a n c i a l c o n s t r a i nt s . F i n a n c i a l c o n s t r a i nt s a r e a l s o m o r e i m p o r t a nt i n e x p l a i n i n g
the variation in cash holdings among the group of advanced fi rms.
The presence of fi nancial constraints has also slowed employment growth,
especially in recent years, as discussed in section C. While it is not surprising that
the average growth in employment is higher among financially unconstrained
fi r m s t h a n a m o n g c o n s t r a i n e dfi r m s , e m p l o y m e n t g r o w t h a m o n g t h e f o r m e r h a s
recovered considerably, whereas among the latter it has continued to be negative
since the economic crisis.
42. As discussed above, fi nancially constrained fi rms are those that do not pay dividends and have a
negative return on assets at the same time.
43. Financially unconstrained fi rms have a larger leverage ratio (19.3 per cent) than constrained fi rms
(13.7 per cent), as measured by debt to total assets. This constitutes an important robustness check
and increases the confidence that the indicator variable is able to capture the presence of fi nancial
distress well. Furthermore, a non-linear relationship between leverage and the effective interest rate
emerges in this setting.
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4. Investment for a job-friendly recovery