What is the link between liquidity constraints and investment behaviour on the one hand, and firm size on the other for a large sample of German firms? These are the questions posed by Research Fellow David Audretsch and Julie Ann Elston in Discussion Paper No. 1072, and assessed over the period 1968–85. The paper examines investment behaviour across firm size using the Q theory of investment model and finds no evidence that the institutional structure of finance in Germany has been able to avoid the impact of liquidity constraints. In particular, the impact of liquidity constraints on investment behaviour tends to increase systematically as firm size decreases. Smaller enterprises tend to be more vulnerable to financing constraints than their larger counterparts, even under the German model of finance where the spread between large- and small-firm lending rates is relatively low. These results support the hypothesis that smaller firms tend to be disadvantaged relative to their larger counterparts in terms of access to finance.

There is, however, evidence that the German model was able to avoid financing constraints on German enterprises prior to the mid-1970s. A particularly striking feature of this era in West Germany was a relative abundance of cheap credit. Since the mid-1970s, there is no evidence that German firms, particularly the smaller enterprises, have been able to avoid finance constraints.

Does Firm Size Matter? Evidence on the Impacts of Liquidity Constraints on Firm Investment Behaviour in Germany
David B Audretsch and Julie Ann Elston

Discussion Paper No. 1072, November 1994 (IO)