Finance or Demand : What drives the Responses of Young and Small Firms to Financial Crises?

Using a large dataset of Greek firms over the period 1998-2014, we investigate the excess sensitivity of small and young firms to the Greek financial crisis, along with the potential sources and aggregate implications. Controlling for size effects, the decline in sales growth rate during the crisis was about 6.6 percentage points larger in young firms than in their mature counterparts. Controlling for age effects, the decline in sales growth rate during the crisis was about 9.8 percentage points larger in small firms than in their large counterparts. Although the excess decline in small firms’ growth rates is driven by both credit constraints and unexpected demand shocks, the excess decline in young firms is driven by financing constraints but not by unexpected demand shocks. The excess sensitivity of small firms accounts for about 13% of the drop in total output of the Greek economy during the crisis, with credit constraints and firm-level unexpected demand shocks contributing almost equally to this. The excess sensitivity of young firms accounts for about 14% of the aggregate output drop, with more than the half of this effect stemming from financing constraints