Business Cycle And Financial Constraint

Financial constraint has long been an important concept in finance. Generally agency problem, information asymmetry and incomplete capital market are the reasons to cause financial constraint. The discusssion has been focused on micro field. This paper tries a research in a macro way. Individual firm will be affected by business cycle which means the environment a firm is in. So it is very important to discuss the influence of macroeconomy on financial constraint.This discussion is based on the theory named financial accelerator. This theory connects the micro financial field of corporate finance with the macroeconomy. Every single flaw of the financial market will amplify the fluctuation of the macroeconomy. This amplification is asymmetric, meaning that economic recession will be depressed more than the prosperity can be boomed.In this paper, I apply the comparative analysis and GMM method to measure the level of financial constraint a. Then Ⅰ use28102records from1996to2012of firms from German, China, Brazil, Japan and UK to test our hypothesis. Cross country research is important because the sample can be larger. Business cycle is a long term movement which cannot afford by data from a single country.Our test confirms that, firms face severe financial constraint in economy recession and face less financial constraint in financial prosperity. And this effect has asymmetry on firms of different size. Small firms are affected more by business cycle than large firms.