The financial accelerator mechanism : the case of portuguese small manufacturing firms

Abstract

Recent developments in the field of information economics have led to the establishment of a link between financial factors and fluctuations in economic activity. An issue that has been highlighted is the possibility that fluctuations in economic activity can be induced by fragilities in the financial status of firms. This fact is known as the financial accele rator mechanism. In terms of company investment, the impact of the financial accelerator means that financial variables (such as, balance sheet position and cash flows) affect firms’ investment decisions. The objective of this paper is to analyse the ex istence of a financial accelerator mechanism in the case of small Portuguese manufacturing firms. In order to do so, an investment function was estimated based on the sales-accelerator principle but integrating variables that reflect the financial status of the firm. Three hypotheses were tested: (1) financial factors are important for all companies; (2) financial factors are more important for companies more affected by information problems in the capital markets; and (3) financial factors are even more important for these companies at times of economic recession.