Accepted Manuscript

Financial constraints, macro-financing environment and post-crisis recovery of firms

Yuying Jin, Mingjin Luo, Chao Wan

PII: S1059-0560(16)30239-8
DOI: 10.1016/j.iref.2018.01.007
Reference: REVECO 1563

To appear in: International Review of Economics and Finance

Received Date: 26 October 2016

Revised Date: 14 November 2017
Accepted Date: 17 January 2018

Please cite this article as: Jin Y., Luo M. & Wan C., Financial constraints, macro-financing environment
and post-crisis recovery of firms, International Review of Economics and Finance (2018), doi: 10.1016/
j.iref.2018.01.007.

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 ACCEPTED MANUSCRIPT

Financial Constraints, Macro-financing Environment and Post-Crisis Recovery

of Firms

Yuying Jin a, Mingjin Luo b,*, Chao Wan c

a
School of International Business Administration, Shanghai University of Finance and Economics,
Shanghai 200433, China

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b
School of International Business Administration, Shanghai University of Finance and Economics,
Shanghai 200433, China

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&School of Finance, Shanghai Lixin University of Accounting and Finance, Shanghai 201209,
China

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c
School of International Economics and Trade, Shanghai Lixin University of Accounting and
Finance, Shanghai 201209, China

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*
Corresponding author: Mingjin Luo
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Tel: +86 18717992202
Email: luo_mingjin@163.com (M. Luo)

Acknowledgements:
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We are very grateful to anonymous referees for their valuable comments, and also to Haoyuan
Ding for his very helpful suggestions.
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We acknowledge financial support from the National Natural Science Foundation of China (No.
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71703086), the National Social Science Foundation of China (No. 12AZD051), and MOE Project
of Humanities and Social Sciences (No.12YJC790180).
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Financial Constraints, Macro-Financing Environment and Post-Crisis Recovery

of Firms

Abstract:

This paper is the first to define the recovery of firms’ performance after the 2007-2008 global

financial crisis. Based on this definition, we present stylized facts on firm recovery using data on

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firms from 106 countries in the aftermath of the crisis, and we focus in particular on the

relationship between firms’ recovery and their financial constraints. Using a probit model, we find

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that firms with stronger financial constraints tend to experience a more sluggish recovery from the

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financial crisis than those with weaker constraints. Furthermore, a well-developed bank financing

market and a bank-oriented financial structure contribute to firms’ recovery by easing their

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financial constraints, but the effect of capital market financing is ambiguous. Although

expansionary fiscal and monetary policies are helpful for a speedy recovery, only expansionary
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monetary policies effectively stimulate firms' recovery by easing their financial constraints.
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Keywords: Firms’ Performance Recovery, Financial Crisis, Financial Constraints,

Macro-Financing Environment, Probit Model

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1. Introduction
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The frequency of financial crises since the early 1990s has clearly exposed the instability of the

global financial system1. The increased difficulty of preventing financial crises indicates that taking
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timely and effective measures to lower the cost of crises and accelerate economic recovery is crucial

for the sustainable growth of the world economy. The 2007-2008 global financial crisis severely
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damaged the world economy, and post-crisis economic recovery has been slow and fragile. As
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shown in Figure 1, except for a strong but temporary rebound in 2010, GDP growth in both

advanced and emerging economies remained lower for 2008-2015 than for 1997-2006. Moreover,

economic activity has varied widely across countries. GDP growth in advanced economies picked

up slightly after 2012, but in emerging markets and developing economies, it has decreased

continuously since 2010. The IMF’s World Economic Outlook from 2009 to 2015 underscored the

1
According to Laeven and Valencia (2013), more than 200 financial crises occurred worldwide from 1980 to
2013.

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theoretical and practical importance of economic recovery. Prolonged recessions after financial

crises tend to impair potential output in the long run. Thus, studying how crisis-hit economies

recover is crucial for reducing output losses and restoring economic growth.

[Fig. 1. Trend in GDP Growth from 2007-2015]

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Notes: Curves in the shaded area represent each country group’s average GDP growth rate from 1997 to 2006.

Research on post-crisis economic recovery mainly focuses on the macro level in an effort to

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identify the factors that affect economic recovery (Bordo et al., 2001; Reinhart and Rogoff, 2009;

Calvo et al., 2013; Cerra et al., 2013; Wan and Jin, 2014; Mitchener and Wandschneider, 2015).

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Macro-economic recovery involves the behavior of all individuals in the economy, especially that

of heterogeneous firms. Because firms vary dramatically in their recovery progress and responses

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to ex-post economic policies, tailored bailouts or stimulus policies that target different firms are
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crucial. Nevertheless, firms’ recovery is not clearly portrayed in the literature, and research on

firms’ economic recovery after financial crises is still limited. Therefore, exploring firms’
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economic recovery after financial crises is valuable.

Financing conditions, which are crucial for a firm’s operation and development, changed
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dramatically after the eruption of the 2007-2008 financial crisis for two main reasons. First, the
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moral hazard that became more serious led to a banking credit crunch, and the cost of financing

through the stock market and other channels also rose dramatically as a result of the contagion
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effect. Second, an expansionary monetary policy was implemented to combat the tightening

liquidity. However, few studies address the effects of financing conditions on firms’ post-crisis
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recovery. Using industry-level data, Kannan (2012) found that growth was slower in industries

that relied more on external financing than those with less such reliance during financial crisis
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recovery periods. Abiad et al. (2011) reached a similar conclusion and further found that industries

that strongly relied on external financing grew extremely slowly during creditless recoveries.

Coricelli and Frigerio (2015) found that having easy access to trade and other credit softened the

credit constraints of firms that had previously relied on bank credit and promoted creditless

recoveries. Using firm-level data from Eastern Europe and Central Asia, Clarke et al. (2012) found

that firms that could easily access external credit were more likely to survive the 2007-2008 global

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financial crisis. By employing a difference-in-differences matching approach, Alfaro and Chen

(2011) found that the subsidiaries of multinational companies performed better than their

counterparts in the same host country during the 2007-2008 global financial crisis. Their

explanation for this result was that the subsidiaries’ stronger financial linkages with their parent

companies made it easier for them to access financial support. Coulibaly et al. (2013) showed that

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financial constraints negatively affected post-crisis performance of firms in six emerging Asian

economies. Comparatively, firms having less exposure to external finance and more liquid assets

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experienced smaller decline in sales.

Based on firm data from 48 developed and developing countries, Medina (2012) showed that

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the scale of firms’ tangible assets contributed significantly to their recovery because of its role as

collateral for loans. In contrast, both pre-crisis short-term debt and high leverage had negative

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effects on the pace of recovery. Lawless et al. (2015) found that an outstanding debt burden,
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measured as the ratio of debt to turnover, had significant negative effects on the performance

recovery of both small and medium-sized enterprises in Ireland.

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Research on the effect of the macro-economic environment on post-crisis economic recovery

has reached inconsistent conclusions. Most scholars have argued that expansionary monetary
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policies promote post-crisis output recovery (Gupta et al., 2003; Cerra et al., 2013; Schmitt-Grohé
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and Uribe, 2012; Calvo et al, 2013; Taylor, 2016). However, the results of studies on the effects of

fiscal policies are variable. Some studies have indicated that a loose fiscal policy contributes to the
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rebound of output (Park and Lee, 2001; Kannan et al., 2009; Gupta et al., 2009), while others have

argued that a tightened fiscal policy acts as a stimulus to economic recovery (Gupta et al., 2003).
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The existing literature on post-crisis recovery is mostly confined to the macro level.

Therefore, the extension to the firm level can be very meaningful for examining how firms recover
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after crises and which factors and mechanisms affect their recovery. An in-depth study of the roles

played by micro- and macro-financing conditions in the post-crisis recovery of firms is therefore

especially interesting and necessary.

This paper attempts to fill the research gap by identifying economic recovery at the firm level

and discovering the impact of financial constraints on firms' performance recovery. Firms with

higher financing constraints are more dependent on external funds and therefore more sensitive to

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fluctuations in credit markets. After the financial crisis, financial institutions are neither capable

nor willing to take on risk due to losses caused by crisis and therefore tend to shrink lending to

firms (Duchin et.al, 2010; Lin and Chou, 2015). Firms, especially those with higher financial

constraints may find it more difficult in obtaining enough external funds to support their

operations. Besides, they may reduce high-quality projects which could have led to more growth

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opportunities and higher profits (Campello et.al, 2010; Musso and Schiavo, 2008). In addition, for

firms with higher financial constrains, the cost of borrowing may rise much higher than that of the

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firms with lower financial constraint after the crisis, which increases the cost of the former more

and undermines their profits. Therefore, by decreasing firms’ access to credit and increasing their

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financing cost, financial constraints could result in low profits, poor performance and make them

more difficult to recover from financial crisis. Furthermore, the macro financing environment

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could also affect the impact of financial constraints on recovery of firms' performance. For
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instance, it will be easier for firms to get credit when the expansionary monetary policy is

undertaken by the central bank, and the effect that financial constraint imposed on the firms’
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performance recovery will be weakened. Therefore, it is also necessary to explore the interaction

effects of macro financing environment and financial constraints on recovery of firms'

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performance.
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Data on firms from 106 countries after the 2007-2008 global financial crisis are used in this

paper. The findings provide new insight into the role of financial constraints and their interaction
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effects with macro factors on firms’ performance recovery. This paper makes two main

contributions, which, as far as we know, have not been taken by existing literatures. First, it
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defines firm-level economic recovery after financial crises. The existing literature usually defines

recovery at the macro level without considering firm heterogeneity. Second, this paper explores
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the interaction effects of both macro- and micro-financing factors on firms’ performance recovery

as well as the mechanisms that affect the recovery process.

The remainder of this paper is organized as follows. Section two defines and describes the

post-crisis recovery of firms’ performance using stylized facts as evidence. Section three

introduces the dataset, the econometric methodology and the primary variables used in the

empirical analysis. Section four discusses the main empirical results. Section five presents the

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robustness tests used in this study. Section 6 provides conclusions.

2. Identification of Firms’ Performance Recovery

First, we define firms’ performance recovery after the 2007-2008 global financial crisis

before investigating how financing constraints influence this recovery. Most studies define and

portray recovery from financial crises based on macro-economic variables (Kannan, 2012; Medina,

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2012) without considering differences among firms. However, financial crises affect individuals

within the economy, including firms, in different ways. Moreover, firms’ performance after

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financial crises varies. Some firms suffer substantial losses, some are barely damaged, and some

are even better off relative to their pre-crisis levels. Thus, firms’ post-crisis performance recovery

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is both necessary and interesting to investigate.

A precondition to this investigation is to define firm-level recovery. Following the approach

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of defining recovery at the macro level (Bordo, 2001; Hong and Tornell, 2005), this paper first
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defines and identifies firm-level recovery in the aftermath of the recent financial crisis. The

recovery of a firm’s performance is defined as the return of a firm’s performance to its pre-crisis
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level, which means that only firms that experienced a drop in performance associated with the

financial crisis can be included in our study sample.

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This paper defines and identifies firm-level recovery after the financial crisis through the
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following two steps:

(1) Identifying firms’ performance decline

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The first step is to identify firms whose performance declined after the 2007-2008 global

financial crisis. Because this crisis—which originated in the U.S.—turned into a global recession
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in 2008, that year marks the onset of the crisis. A firm’s performance in 2008 is defined as yi ,08 .
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The average value of a firm’s performance from 2001 through 2007 is considered its trend-level

performance ( y pre ) in tranquil periods. If yi ,08 < yi ,pre , we identify the firm as experiencing

decreased performance associated with the financial crisis and include it in our sample. Return on

assets (ROA) is used to represent firm-specific performance, which is calculated as income before

extraordinary items divided by total assets (Klein, 2002; Cohen and Zarowin, 2010).

(2) Identifying firms’ performance recovery

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The second step is to identify firms’ performance recovery. Post-crisis yearly performance

yi ,t from 2009 through 2014 is compared to its pre-crisis level yi ,pre sequentially. A recovery is

attained in year t when yi ,t > yi ,pre for the first time.

3. Data and Empirical Analysis

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3.1. Data

Firms’ financial data are derived from Wharton Business School’s Compustat Global at the

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University of Pennsylvania. The sample covers 32,238 firms for the 2000-2014 period. We delete

firms with repeated statistics in the same year. Since the focus is on economic recovery, we also

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delete financial firms with industrial codes (SICs) from 6000–6999. The sale of large-scale assets

and purchasing behavior could lead to extreme fluctuations in ROA; however, this volatility is not

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a reflection of a normal change in firms’ performance. Hence, following Chacar et al.’s (2010)
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method, we drop the likely outliers whose absolute value exceeds 50%. Based on this rule, 24620

firms are retained in our sample, among which 11870 firms did not experience a decrease in
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performance, with an average ROA of 0.05 in 2008. In contrast, 12750 firms experienced a

decrease in ROA during the crisis, and their average ROA in 2008 was as low as -0.018. Finally,
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with the focus on firms’ post-crisis performance recovery, we further drop firms that did not
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experience an associated decrease in ROA after the financial crisis, as defined above. Our final

sample consists of 139,412 observations from 12,750 firms across 106 countries.
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3.2. Measuring Firms’ Financial Constraints

The first variable that we choose to represent firms’ financial constraints is their reliance on
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external financing (Exfin). This reliance is a typical indicator used to measure a firm’s ability to
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acquire medium- and long-term financing, and it is calculated as the ratio of a firm’s capital

expenditures minus cash flow to capital expenditures (Rajan and Zingales, 1998; Kroszner et al.,

2007; Manova et al., 2015). A higher level of Exfin indicates that a firm’s investment and capital

expenditures depend more on external financing than internal financing. Investments with

expectations of high return rates are negatively affected by financial crises. Such an effect is likely

to cause a decline in the expected return rate and to adversely affect firms’ performance.

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Furthermore, firms that rely more on external financing are more vulnerable to financial

constraints during a credit crunch than those that rely more on internal financing. Thus, we expect

that firms with a higher degree of external financing are subject to a slower and more protracted

recovery.

The other variable used to represent firms’ financial constraints is asset tangibility (Tang). It

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is calculated as the share of a firm’s tangible assets in total assets, where tangible assets are the

sum of property, plants, and equipment that could be used as collateral. This indicator is

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commonly used to measure a firm’s external financing constraints (Manova, 2013; Feestra et al.,

2014; Manova et al., 2015). When crises erupt, firms with more tangible assets may have less

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difficulty obtaining loans through mortgage financing during a credit crunch; such resources

provide firms with timely financial support and contribute to a prompt recovery.

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3.3. Recovery of Firms’ Performance: Stylized Facts
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The recovery rate of firms’ performance represented by ROA declined after the 2007-2008

global financial crisis, as shown in Table 1. Of the 12057 firms in the sample, 2363 firms that
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suffered from the crisis subsequently recovered in 2009, representing 19.60% of the sample; this
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ratio declined to 18.62% in 2010 and to 7% between 2012 and 2014. Overall, firms’ recovery after

the crisis was not optimistic. By the end of 2014, more than 5000 firms’ ROA had not returned to
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pre-crisis levels.
Table 1
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Recovery of firms’ performance (ROA) after the financial crisis.

Number Number of Firms Percentage of Firms

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of Firms Recovered Recovered

2009 12,057 2363 19.60%
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2010 9305 1733 18.62%

2011 7229 667 9.23%
2012 6283 453 7.21%
2013 5585 352 6.30%
2014 4993 273 5.47%

Furthermore, we demonstrate the probability of firm recovery from the perspective of regions

in Figure 2. Corresponding to higher economic growth, firms in East Asia and South Asia

experienced the fastest recovery after the financial crisis, followed by firms in Europe and Latin

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America. The post-crisis average GDP growth in Africa remained above 3%, but firms in this

region experienced a disproportionately sluggish recovery.

[Fig. 2. Probability of Firm Recovery after the Financial Crisis: Regional Differences]

Source: WDI Database of the World Bank

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Notes: The histogram represents the average probability of firms’ performance recovery from 2009 to 2012 in

each region. The line chart represents the corresponding regional GDP growth rate.

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The severity of the financial crisis had a differentiated impact on firms' performance. We

choose two indicators to measure the severity of the crisis. One is the extent to which individual

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firms were affected by the financial crisis, defined as Decline, which is calculated as the

difference between a firm’s ROA in 2008 and its pre-crisis average. The other is the overall impact

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of the crisis on an economy, defined as Ratio, which is calculated as the ratio of the number of
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affected firms to unaffected firms in an economy.

We use the Pearson correlation test to explore the relationship between crisis severity and
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firm recovery, and the results are shown in Table 2. We find that Decline has a significantly

negative relationship with the recovery rate of ROA, and this impact is especially significant in
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2011 and 2012. However, the relationship between the Ratio and the recovery rate of ROA is
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ambiguous and insignificant, indicating that the severity of the crisis in an economy does not

necessarily serve as a drag on corresponding individual firms' recovery.

Table 2
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Pearson correlation test of recovery probability of ROA with Decline and Ratio
Recovery of ROA

all 2009 2010 2011 2012 2013 2014

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* * * *
Decline -0.0162 -0.0181 -0.0143 -0.0438 -0.0520 -0.0295 -0.0319*
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Ratio -0.0018 -0.0044 0.002 -0.0073 0.0013 0.0166 0.0012

Notes: * represents significance at the 5% level.

The relationship of financial constaints and ROA

To explore the relationship between financial constraints and firms’ performance recovery, a

split-sample analysis is performed as a preliminary study. We compare firms’ ROA and their

performance recovery according to different levels of financial constraints. High exfin is defined

as firms with a positive exfin, and Low exfin is defined as firms with a negative exfin. High tang

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represents firms with an above-average level of tangible assets, and Low tang represents those

with a below-average level of tangible assets. We also split the firms into Big and Small based on

their sizes in terms of total assets.

The results are shown in Table 3. As indicated in Panel A, the ROA recovery rate is lower for

the High exfin group, which could mean that more financially constrained firms have more

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difficulty recovering. This difference was especially significant in 2009-2010 and declined

afterward. From the perspective of asset tangibility shown in Panel B, a similar conclusion can be

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drawn, i.e., Low tang is associated with a lower ROA recovery rate. Furthermore, Big firms’

financial constraints show a larger difference in recovery rates compared with those of small firms,

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although big firms’ recovery rates are generally higher than those of small firms, as shown in the

last two columns of Table 3.

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Moreover, in contrast with the relationship between financial constraints and firms’
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performance recovery, the first column in Table 3 indicates that the relationship between financial

constraints and the ROA level is ambiguous over the sample period.
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Table 3
The relationship between financial constraints and firms’ performance and recovery.
Recovery of Recovery of Recovery of Recovery of
Recovery of
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ROA ROA ROA ROA ROA

ROA
(2009-2010) (2011-2014) Big Small
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A. Summary of firms’ performance and recovery, by exfin

High exfin 0.03 0.12 0.17 0.07 0.12 0.11
Low exfin 0.03 0.14 0.2 0.08 0.15 0.11
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diff 0 0.02 0.03 0.01 0.03 0

B. Summary of firms’ performance and recovery, by tang
High tang 0.23 0.14 0.21 0.08 0.16 0.12
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Low tang 0.33 0.12 0.17 0.07 0.12 0.11

diff -0.1 0.02 0.04 0.01 0.04 0.01
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Notes: The diffs in Panel A are the values of low exfin minus those of high exfin, and the diffs in Panel B are
the values of high tang minus those of low tang.

3.4. Empirical Specification

In this section, we examine the effects of financial constraints on firms’ post-crisis ROA

recovery. As discussed above, financial constraints may undermine firms ROA and impede its

recovery through its impact on firm's credit availability and financing cost. A probit model is

employed to perform the estimation. Under the assumption that ε it has a normal distribution with
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zero mean and unit variance, the probability of recovery can be written as follows:

P( Recov eryit = 1 )
=Prob( α + β1Finvulit + β2 Sizeit +β3Employit +β4 R&Dit + εit > 0 ) (1)
=Φ ( α + β1Finvulit + β2 Sizeit +β3Employit +β4 R&Dit )

where Φ ( ) represents the standard normal cdf. The dependent variable re cov eryit takes the

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value of 1 if a firm’s ROA recovered after the crisis in year t; otherwise, it takes the value of 0.

The explained variable is the probability of ROA recovery.The explanatory variables for firms’

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financial constraints are denoted as Finvulit, as represented by Exfin and Tang, respectively. As

shown in Table 3, the relationship between financial constraints and firms’ performance recovery

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is negative. This negative relationship could indicate that the more financial constraints a firm

faces, the more difficult it is for its ROA to recover. Hence, we expect β1 < 0 . The firm-specific

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control variables include firm size (Size), the logarithmic number of employees (Employ), and
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research and development expenditures (R&D). Size is the logarithmic form of total assets, and

R&D is the ratio of research-and-development expenditures to total assets. Meanwhile, to alleviate

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the problem of spurious results caused by outliers, values above the 97.5th percentile and below

the 2.5th percentile for each variable are dropped. Furthermore, the standard errors are clustered
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by firm to overcome the possibility of firm-level heteroscedasticity and autocorrelation. The

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descriptive statistics of the explanatory variables are presented in Table 4.

Table 4
Descriptive statistics of explanatory variables.
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N mean Sd p50 p25 p75 min max

Exfin 128951 -7.40 15.14 -1.16 -6.31 0.35 -59.70 0.92
Tang 130931 0.57 0.36 0.54 0.27 0.84 0.05 1.30
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Size 139412 7.72 2.74 7.56 5.69 9.70 3.06 12.96

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Employ 124804 0.18 1.87 0.05 -0.99 1.36 -6.91 6.57

R&D 139413 0.01 0.01 0 0 0 -0.00 0.05
Notes: Columns 1, 2, and 3 list the number, mean value, and standard deviation, respectively, of each variable
within the sample. Columns 4, 5 and 6 show the value of each variable at the 50th percentile, 25th percentile and
the 75th percentile in the distribution, respectively. Columns 7 and 8 show each variable’s minimum and
maximum.

4. Analysis of Empirical Model

4.1. Baseline Results

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We estimate using both a probit model (shown in columns (1)–(2) in Tables 5-9) and a panel

probit model (shown in columns (3)–(4)). As shown in Table 5, the baseline results indicate that

external financing (Exfin) has a negative influence on firms’ performance recovery, which implies

that firms with a higher degree of external financing have greater difficulty recovering. Moreover,

a credit crunch during a financial crisis aggravates the problem of information asymmetry.

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Compared with tranquil episodes, a credit crunch makes it more difficult for firms to access

financing, which results in shrinking output and a slower recovery. The conclusion still holds

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when we control for firm and time effects in the estimation using the panel probit model.

Tangible assets (Tang) had a significantly positive effect on firms’ performance recovery, as

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shown in columns (2) and (4) in Table 5. This result indicates that firms with more tangible assets

could access external funding much easier by using those assets as collateral, which made the

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firms less likely to be affected by the credit crunch during the financial crisis and thus contributed
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to a high probability of recovery.

In addition, the coefficients of firm size (Size) are significantly positive, indicating that large
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firms were more likely to recover than small- and medium-sized firms. Firms with more

employees had a lower probability of recovery, as indicated by the negative coefficients of

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Employ. After controlling for firm and time effects, the coefficients of R&D become insignificant,
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which shows that expenditures on R&D did not necessarily contribute to firms’ performance

recovery after the financial crisis.

Table 5
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Effects of financial constraints on the recovery of firms’ performance.

(1) (2) (3) (4)

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Exfin Tang Exfin Tang

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Finvul -0.00162** 0.259*** -0.00245*** 0.319***

(0.000702) (0.0329) (0.000938) (0.0450)

Size 0.0431*** 0.0340*** 0.0662*** 0.0538***

(0.00488) (0.00491) (0.00686) (0.00685)

Employ -0.0525*** -0.0588*** -0.0633*** -0.0741***

(0.00819) (0.00771) (0.0113) (0.0105)

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R&D 4.713*** 4.827*** 6.304*** 6.244***

(0.799) (0.795) (1.078) (1.067)

Constant -1.428*** -1.492*** -1.671*** -1.729***

(0.0445) (0.0437) (0.0636) (0.0618)

Firm Effects N N Y Y

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Time Effects N N Y Y

Observations 17,515 17,856 17,515 17,856

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Notes: Finvul represents two specific variables, Exfin and Tang, and the dependent variable is ROA recovery.

Clustered standard errors are reported in parentheses; *, **, and *** represent significance at the 10%, 5%, and 1%

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levels, respectively.

4.2. The Effects of the Macro-Financing Environment

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The timely recovery of firms' performance is crucial to reducing the costs of financial crises.
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However, credit crunches after financial crises usually tighten liquidity and prolong recovery. In

an attempt to overcome such a liquidity squeeze, authorities tend to use various policies,
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especially expansionary fiscal and monetary policies. However, previous studies’ findings on the
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effectiveness of these policies on post-crisis economic recovery are inconsistent. Several studies

argue that expansionary fiscal and monetary policies contribute to output recovery after financial
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crises (Cerra et al., 2013; Kannan et al., 2009; Gupta et al., 2009), while other studies have

reached the opposite conclusion (Gupta et al., 2003; Park and Lee, 2003). The effect of policies on
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firm recovery and the channels through which they affect the recovery process thus remain unclear.

We attempt to explore the impact of fiscal and monetary policies on firms' recovery through their
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influences on the financial constraints faced by firms. Meanwhile, by considering the impact of
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certain macro-financial fundamentals such as the financial structure and the level of financial

development on firms’ financial constraints, we also investigate the effects of these two factors on

the recovery of firms' performance through their influences on financial constraints.

Therefore, we further investigate the interaction effects of macro-financial fundamentals and

a firm’s external financial constraints. The extended probit model that includes these interaction

items takes the following form:

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P( Re cov eryij ,t = 1 )
=Prob( α + β1 Finvulij ,t + β 2 Macro j ,t × Finvulij ,t +β 3Sizeij ,t +β 4 Employij ,t +β 5 R&Dij ,t + ε ij ,t > 0 ) (2)
=Φ ( α + β1 Finvulij ,t + β 2 Macro j ,t × Finvulij ,t + β 3Sizeij ,t +β 4 Employij ,t +β 5 R&Dij ,t )

where Macro j ,t includes four variables that describe a country's macro-financial environment: the

level of financial development (Credit and Stock), a dummy variable representing a

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bank-dominated financial structure (Bank-based), monetary policy (Monetary), and fiscal policy

(Fiscal). Here, Finvul represents the same variables as in the basic model, measuring a firm’s

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financial constraints (Exfin and Tang). All macro-economic data are derived from the World

Bank’s World Development Indicator (WDI) database. Except for the bank-based variable, all

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macro-level variables are in the form of the actual value divided by 1000 to improve the

interpretability of the results.

U
4.2.1 Financial Development
AN
Following other studies (Levine and Zervos, 1998; Rajan and Zingales, 1998; Levine et al.,

2000), we use two indicators to measure a country’s level of financial development. The first is the
M

average level of the ratio of the market capitalization to GDP (Stock) over the sample period,

which is used as a rough measurement of the development of a country’s capital market financing.
D

The second indicator is the mean value of private credit as a proportion of GDP over the sample
TE

period (Credit), which measures the development of a country’s bank financing market. Thus, the

larger the value of the indicator is, the more developed is the country’s financial market.
EP

As shown in Table 6, the coefficients of the interaction items Credit×Exfin, as shown in

column (1) and column (3), are significantly positive, which indicates that a more developed bank
C

financing market helps ease the financial constraints of firms that are more reliant on external

financing and contributes to firms’ performance recovery. The effects of Credit×Tang are also
AC

positive but are not significant, which demonstrates that the interaction effects of "credit" through

tangible assets are not so obvious. However, the coefficients of the interaction items Stock×Exfin

and Stock×Tang are mostly negative and insignificant after controlling for firm and time effects;

this result indicates that the level of development of the stock market has no obvious interaction

effect on the relationship between financial constraints and ROA recovery. Overall, relative to

capital market financing, the development of the bank financing market could provide better

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financial support for crisis-influenced firms, especially those with adequate mortgage assets, and

in turn could help ease financial constraints and contribute to a better recovery.
Table 6
Interaction effects of financial development and financial constraints on the recovery of firms’ performance.

(1) (2) (3) (4)

Exfin Tang Exfin Tang

PT
Finvul -0.00558 0.254* -0.00637 0.307*

(0.00445) (0.142) (0.00525) (0.175)

RI
Stock×Finvul -0.00682 -0.444 0.00265 -0.513

(0.0376) (1.599) (0.0446) (1.958)

SC
Credit×Finvul 0.0196** 0.315 0.0216** 0.277

(0.00886) (0.410) (0.0107) (0.506)

size 0.0173

U 0.0179 0.0264* 0.0274**

AN
(0.0112) (0.0111) (0.0141) (0.0137)

lnemp 0.00987 -0.00532 0.0146 -0.00586

M

(0.0128) (0.0123) (0.0162) (0.0153)

R&D 1.163 1.476 1.018 1.469

D

(1.039) (1.042) (1.345) (1.318)

TE

Stock -3.186*** -2.416** -3.928*** -2.987**

(0.647) (1.084) (0.812) (1.323)

EP

Credit 1.484*** 1.072*** 1.882*** 1.431***

(0.212) (0.320) (0.272) (0.400)

C

Firm effects N N Y Y
Time Effects N N Y Y
AC

Constant -1.210*** -1.359*** -1.326*** -1.499***

(0.114) (0.151) (0.143) (0.185)

Observations 8,639 8,745 8,639 8,745

Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

ROA. Clustered standard errors are reported in parentheses; *, **, and *** represent significant levels at 10%, 5%,

and 1%, respectively.

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4.2.2. Financial Structure

Following Ergungor (2004), we measure the Financial structure of a country’s economy

using the average ratio of credit to stock. The higher the value of the index of financial structure is,

the more a country's financial market is dominated by banks. Otherwise, a country's financing is

more dependent on capital markets. As shown in Table 7, after controlling for the effects of

PT
financial development, the coefficient of Financial structure×Exfin is significantly positive,

indicating that a financial market dominated by bank financing eases the restrictive effects of

RI
financial constraints on firms' performance recovery. The financial structure also has a weak

positive effect through the influence of tangible assets on firms' performance recovery, as

SC
indicated by the coefficients of Financial structure×Tang.
Table 7

U
Interaction effects of financial structure and financial constraints on the recovery of firms’ performance.

(1) (2) (3) (5)

AN
VARIABLES Exfin Tang Exfin Tang

Finvul -0.00126 0.239* -0.00201 0.335**

M

(0.00108) (0.130) (0.00130) (0.156)

D

Financial structure×Finvul 0.00173** 0.0191 0.00180* 0.00413

(0.000813) (0.0342) (0.000952) (0.0411)

TE

Size 0.0296*** 0.0295*** 0.0426*** 0.0425***

(0.0115) (0.0113) (0.0142) (0.0139)

EP

Employ -0.00190 -0.0182 -0.000872 -0.0214

(0.0132) (0.0127) (0.0163) (0.0155)

C

R&D 1.360 1.305 1.214 1.210

AC

(1.075) (1.079) (1.348) (1.334)

Structure 0.495*** 0.409*** 0.465*** 0.379***

(0.0756) (0.0771) (0.0891) (0.0899)

Stock 0.00465*** 0.00423*** 0.00453*** 0.00408***

(0.00128) (0.00128) (0.00147) (0.00145)

Credit -0.00459*** -0.00401*** -0.00396*** -0.00331***

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(0.000854) (0.000855) (0.00101) (0.00101)

Firm effects N N Y Y

Time Effects N N Y Y

Constant -1.957*** -1.988*** -2.122*** -2.194***

(0.162) (0.180) (0.191) (0.212)

PT
Observations 8,064 8,157 8,064 8,157

Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

RI
ROA.Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%,

and 1%, respectively.

SC
4.2.3. Fiscal and Monetary Policies

U
A country’s monetary and fiscal policies are represented by the annual growth rate of broad

money (Monetary) and the change in the ratio of expenditures to GDP (fiscal), respectively. As
AN
shown in Table 8, monetary policy is an important force in promoting the recovery of firms, while

fiscal policy does not have such a significant influence. Furthermore, we investigate the
M

interaction effects of monetary and fiscal policies on firms' financial constraints. As shown in
D

columns (1) and (3), the coefficients of Monetary×exfin are positive and significant, indicating

that expansionary monetary policies have stimulus effects on firms’ performance recovery by
TE

easing financial constraints. Expansionary monetary policies lower interest rates and also create an

easy credit environment for firms and improve its balance sheet, making it easier for them to
EP

obtain loans that can help stimulate their recovery. The coefficients of the interaction term

Monetary×Tang are also not significant, as shown in columns (2) and (4), indicating that the
C

impacts of monetary policies on firms' recovery are not affected by the scale of tangible assets.
AC

The coefficients of Fiscal×Exfin are insignificant, which suggests that an expansionary fiscal

policy does not necessarily stimulate firms' recovery by easing their financial constraints.

Nevertheless, the coefficients of Fiscal×Tang are significantly negative, indicating that

expansionary fiscal policies make recovery even more difficult for firms with higher levels of

collateral. A possible explanation for this result is that the rising interest rates caused by

expansionary fiscal policies increase the financing costs for firms using tangible assets as

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collateral. Consequently, firms’ performance recovery is delayed.

Table 8
Interaction effects of monetary and fiscal policies with financial constraints on firms’ performance recovery.

(1) (2) (3) (4)

Exfin Tang Exfin Tang

Finvul -0.00317* 0.279*** -0.00249* 0.362***

PT
(0.00164) (0.0483) (0.00146) (0.0685)

Monetary×Finvul 0.00111** -0.00402 0.000609* -0.00298

RI
(0.000551) (0.00592) (0.000361) (0.00819)

Fiscal×Finvul 0.000150 -0.0553*** 0.000331 -0.0855***

SC
(0.000388) (0.0187) (0.000389) (0.0216)

Size 0.0296*** 0.0223*** 0.0291*** 0.0455***

(0.00560)

U (0.00562) (0.00561) (0.00862)

AN
Employ -0.0305*** -0.0304*** -0.0349*** -0.0459***

(0.00966) (0.00964) (0.00913) (0.0135)

M

R&D 4.224*** 4.007*** 4.201*** 5.313***

(0.932) (0.928) (0.931) (1.341)

D

Monetary -0.00923*** -0.00967** -0.00901*** -0.0236***

TE

(0.00293) (0.00466) (0.00295) (0.00664)

Fiscal 0.000837 0.0328** 0.00639 -0.0256

EP

(0.00897) (0.0142) (0.00782) (0.0174)

Constant -1.168*** -1.264*** -1.172*** -1.400***

C

(0.0582) (0.0591) (0.0580) (0.0889)

AC

Firm Effects
N N Y Y

Time Effects N N Y Y

Observations 12,887 13,156 12,887 13,156

Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

ROA. Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%,

and 1%, respectively.

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5. Discussion

5.1 Other Measures of Firms' Performance

Return on equity (ROE) is used to measure firms’ performance in an alternative estimation,

and the new dummy variable recovery_ROE is used to represent the recovery of ROE. Here,

recovery_ROE equals 1 if a recovery from the crisis is identified and 0 otherwise. In addition, the

PT
pre-crisis averaged level of firm performance is substituted for the pre-crisis three-year average of

firms’ ROA, and another dummy, Alter_ROA, is produced accordingly. The results are consistent

RI
with our finding that a high degree of financial constraints impedes firms' performance recovery

SC
after the financial crisis.
Table 9
Financial constraints and recovery of firms' performance: using Recovery_ROE and Alter_ROA as proxies for firms'

U
performance.

(1) (2) (3) (4)

AN
Recovery_ROE Recovery_ROE Alter_ROA Alter_ROA

Exfin -0.0042*** -0.0055*** -0.0049*** -0.0062***

M

(0.0005) (0.0008) (0.0005) (0.0008)

D

Tang 0.4660*** 0.6700*** 0.4220*** 0.5890***

(0.0261) (0.0436) (0.0262) (0.0443)

TE

Size 0.0200*** 0.0465*** 0.0199*** 0.0450***

(0.0034) (0.0059) (0.0034) (0.0060)

EP

Employ -0.0420*** -0.0549*** -0.0456*** -0.0566***

(0.0328) (0.0480) (0.0324) (0.0483)

C

R&D 1.0990* 0.9760 1.0890* 1.3760

AC

(0.5870) (0.9730) (0.5940) (0.9970)

Constant -1.6750*** -2.1780*** -1.6480*** -2.1250***

(0.0336) (0.0599) (0.0337) (0.0601)

Firm Effects
N Y N Y
Time Effects
N Y N Y

Observations 40,278 40,278 39,987 39,987

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Notes: Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%,

5%, and 1%, respectively.

5.2 Robustness Test with Other Control Variables

5.2.1 Controlling for the Severity of the Crisis

The size of the decrease in a firm's ROA is an important perspective to, which may affect

PT
their probability of recovery. As two different ways to measure the severity of financial crises’

impact on firms, the extent to which financial crisis affected the individual firms and the

RI
corresponding countries have been defined and demonstrated by Decline and Ratio, respectively.

As shown in Table 10, after controlling for these two additional variables, Exfin still has a

SC
significantly negative impact on the probability of firms’ performance recovery, and Tang also has

a positive influence on the probability of ROA recovery. Decline has significantly negative impact,

U
which indicates that the extent to which enterprises are affected by the crisis is an important factor
AN
determining their subsequent recovery.

Table 10
M

Robust estimation controlling for the severity of the crisis.

(1) (2) (3) (4)
D

Exfin Tang Exfin Tang

Finvul -0.00181** 0.222*** -0.00268*** 0.262***

TE

(0.000730) (0.0338) (0.000957) (0.0453)

Size 0.0322*** 0.0249*** 0.0489*** 0.0394***
(0.00516) (0.00520) (0.00704) (0.00706)
EP

Employ -0.0684*** -0.0719*** -0.0836*** -0.0908***

(0.00854) (0.00798) (0.0115) (0.0106)
R&D 4.211*** 4.274*** 5.450*** 5.358***
C

(0.818) (0.813) (1.077) (1.068)

Decline -0.892*** -0.815*** -1.295*** -1.176***
AC

(0.189) (0.184) (0.257) (0.249)

Ratio 0.0130 0.0120 0.0186 0.0172
(0.0105) (0.0102) (0.0134) (0.0131)
Constant -1.245*** -1.303*** -1.388*** -1.442***
(0.0532) (0.0527) (0.0722) (0.0708)
N Y
Firm Effects N Y
N Y
Time Effects N Y

Observations 16,068 16,391 16,068 16,391

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Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

ROA. Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%,

and 1%, respectively.

5.2.2 Controlling for Country-year Effects and Sector-year Effects

We further control for country-year effects and sector-year effects in the panel probit model

PT
as a robustness test. The empirical results using country-year dummies are shown in column (1)

and column (2) of Table 11. We find that Exfin has significantly negative effects on ROA recovery,

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and Tang has significantly positive effects; these findings are consistent with the conclusions of

our basic model. The results using sector-year dummies, shown in column (3) and column (4),

SC
find that the main conclusion still holds.
Table 11
Financial constraints and recovery of firms’ performance: controlling for country-year effects and sector-year

U
effects.
AN
(1) (2) (3) (4)

Exfin Tang Exfin Tang

M

Finvul -0.00160** 0.273*** -0.00194* -0.513***

(0.000754) (0.0366) (0.00107) (0.170)

D

Size 0.0842*** 0.0788*** 0.0757*** 0.0970***

TE

(0.00780) (0.00768) (0.00779) (0.00864)

Employ -0.0598*** -0.0734*** -0.0762*** -0.0585***

EP

(0.0113) (0.0105) (0.0107) (0.0125)

R&D 6.551*** 6.713*** 6.707*** 7.462***

C

(1.075) (1.061) (1.074) (1.217)

Firm effects Y Y Y Y
AC

Country-year Effect Y Y N N

Sector-year Effects N N Y Y

Constant -1.821*** -1.920*** -1.983*** -2.060***

(0.0701) (0.0695) (0.0710) (0.0800)

Observations 17,515 17,856 17,770 17,372

Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

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ROA. Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%,

and 1%, respectively.

5.3 Robustness Test of Capital Market Development

We replace the ratio of the market capitalization to GDP (Stock) with the ratio of the number

of stocks traded to GDP (Stocktraded) to measure the development of a country’s capital market

PT
financing. to. As indicated by the significance of the coefficient of Credit×Finvul and the

insignificance of Stocktraded×Finvul in Table 12, similar results are found regarding the

RI
effectiveness of easing financial constraints through bank financing rather than capital market

financing.

SC
Table 12
Financial constraints and recovery of firms’ performance: using stocks traded as proxies for the development of
capital market financing.

U
(1) (2) (3) (4)
AN
Exfin Tang Exfin Tang

Finvul -0.0071*** 0.1980*** -0.0069** 0.2250**

M

(0.0021) (0.0709) (0.0030) (0.1100)

Stocktraded×Finvul 0.0312 -0.2960 0.0117 -0.5080

D

(0.0261) (0.5670) (0.0350) (0.8220)

TE

Credit×Finvul 0.0176** 0.5210* 0.0217* 0.8390*

(0.0078) (0.2920) (0.0112) (0.4600)

EP

Size 0.0220*** 0.0155*** 0.0387*** 0.0285***

(0.0050) (0.0051) (0.0082) (0.0082)

C

Employ -0.00830 -0.0188 -0.00935 -0.0225

(0.0133) (0.0128) (0.0168) (0.0160)

AC

R&D -0.3520 -0.3120 -1.3540 -1.5750

(0.9240) (0.9300) (1.4870) (1.4680)

Stocktraded -1.3210*** -0.8780*** -1.3350*** -0.6510

(0.3290) (0.3400) (0.5170) (0.5270)

Credit 1.5380*** 1.0190*** 2.4040*** 1.6510***

(0.1460) (0.2180) (0.2430) (0.3530)

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Constant -1.4410*** -1.4930*** -1.7890*** -1.8240***

(0.0572) (0.0708) (0.0958) (0.1140)

Firm Effects N N Y Y

Time Effects N N Y Y

Observations 14,894 15,171 14,894 15,171

PT
Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is recovery of

ROA .Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%,

RI
and 1%, respectively.

5.4 Estimating using Ordered Probit Model

SC
We also use an ordered probit model to replace our basic probit model in order to confirm the

impact of financing constraints on firms' recovery from another perspective. Compared with our

U
basic probit model, the independent variable in an ordered probit model is the time required for
AN
the recovery of firms' ROA instead of the probability of recovery. The empirical results using the

ordered probit method are shown in Table 13. With regard to the results, the explanatory variables
M

in the estimation results are the mean of each variable until the year of recovery as shown in

column (1) and column (2)), and the corresponding one-period lags as shown in column (3) and
D

column (4). We find that the effects of Exfin are generally negative and significant in column (3),
TE

indicating that financially constrained firms recovered more slowly after the financial crisis than

those without constraints. The coefficients of Tang are positive and significant, demonstrating that
EP

firms with more tangible assets recovered faster after the crisis than those with fewer tangible

assets. The main conclusions using the ordered probit method are consistent with those obtained
C

using our basic model. Firms with a higher probability of recovery are also likely to recover faster

from the crisis.

AC

Table 13
The impact of financial constraints on recovery of ROA: using an ordered probit model.
(1) (2) (3) (4)
VARIABLES Mean variables Mean variables Lagged variables Lagged variables

Exfin -0.00135 -0.00523***

(0.000970) (0.00156)
Tang 0.252*** 0.496***
(0.0438) (0.0658)
Size -0.0326*** -0.0240*** -0.0488*** -0.0263***

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(0.00638) (0.00645) (0.00973) (0.0102)
Employ 0.00166*** 0.00161*** 0.00278*** 0.00222***
(0.000551) (0.000549) (0.000729) (0.000720)
R&D -4.802*** -4.900*** -2.646*** -3.061***
(1.069) (1.067) (0.870) (0.870)
Constant cut1 -1.078*** -1.143*** -1.179*** -1.372***
(0.0603) (0.0596) (0.103) (0.102)
Constant cut2 -0.527*** -0.594*** -0.527*** -0.718***

PT
(0.0596) (0.0588) (0.102) (0.101)
Constant cut3 -0.341*** -0.409*** -0.345*** -0.529***
(0.0594) (0.0586) (0.102) (0.101)

RI
Constant cut4 -0.205*** -0.275*** -0.204** -0.389***
(0.0593) (0.0584) (0.101) (0.100)

SC
Constant cut5 -0.111* -0.181*** -0.0938 -0.275***

(0.0592) (0.0583) (0.101) (0.100)

Constant cut6 -0.0315 -0.0990* 0.00148 -0.177*

U
(0.0592) (0.0583) (0.101) (0.100)
Observations 4,454 4,528 2,117 2,124
AN
Notes: the dependent variable is recovery time of firms' ROA. Standard errors are reported in parenthesis;*,

**, and *** represent significant levels at 10%, 5%, and 1%, respectively.
M

5.5 The Impact of Financial Constraints on Firms' ROA

We estimate the impact of financial constraints on firms’ ROA after the crisis using a panel
D

regression model, and the empirical results are shown in Table 14. The results of the fixed effects
TE

model are shown in columns (1) and (2), and those of the random effects model are shown in

columns (3) and (4). We find that Exfin had a significantly negative influence on ROA after the
EP

financial crisis, which indicates that firms with greater reliance on external financing had a lower

ROA after the financial crisis. Most of the time, having a lower ROA after the financial crisis also
C

meant that firms’ ROA recovery to pre-crisis levels was difficult. Tang had a significantly
AC

negative influence on ROA after the financial crisis, indicating that firms with larger tangible

assets tended to suffer from a lower level of ROA. In contrast, the estimation in equation (1)

shows that Tang promoted the recovery of ROA after the crisis.
Table 14
Effects of financial constraints on firms' ROA: using a panel regression model.

(1) (2) (3) (4)

VARIABLES Exfin Tang Exfin Tang

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Finvul -0.0236** -0.0967*** -0.0243*** -0.0967***

(0.0120) (0.00862) (0.00936) (0.00862)

Size 0.00523*** 0.00206 0.00282*** 0.00206

(0.00178) (0.00184) (0.000427) (0.00184)

Employ 0.00131 0.00420* 0.00642*** 0.00420*

PT
(0.00253) (0.00237) (0.000648) (0.00237)

R&D -0.615*** -0.555*** -0.331*** -0.555***

RI
(0.152) (0.148) (0.0709) (0.148)

Constant -0.0201 0.0655*** -0.00500 0.0655***

SC
(0.0152) (0.0170) (0.00386) (0.0170)

Control FE FE RE RE

U
Observations 27,355 27,855 27,355 27,855
AN
Notes：Finvul represents two specific variables Exfin and Tang; and the dependent variable is firms' ROA.

Clustered standard errors are reported in parenthesis;*, **, and *** represent significant levels at 10%, 5%, and
M

1%, respectively.

6. Conclusion
D

In this paper, we define for the first time firm-level economic recovery after the 2007-2008
TE

financial crisis. Based on this definition, we identify firm recovery after the 2007-2008 global

financial crisis and document a set of stylized facts. We find that the average recovery rate of firms
EP

from 2009-2014 was relatively low, which is consistent with the sluggish recovery at the macro

level. The recovery of firms obviously slowed down as time passed, and firms in Asia fared better
C

than those in other regions.

AC

Based on the identification of firms’ performance recovery, we investigate the impact of

financial constraints on firm recovery using a probit model. The results show that post-crisis

financial constraints hindered firms’ recovery. Specifically, for firms that depended more on

external financing or those with fewer tangible assets, accessing external financing, which is

crucial to supporting operations and recovery, was difficult during the post-crisis credit crunch.

We further explore how a country’s macro-financing environment, including policies and

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financial fundamentals, influences the relationship between financial constraints and firms’

recovery. Our conclusions suggest that a more developed credit market contributes significantly to

the recovery of firms by easing their financial constraints. However, instead of effectively

weakening the inhibition of financing constraints on firms' recovery, the development of the stock

market strengthens the negative effects of financial constraints to some degree. A bank-based

PT
financial structure is conducive to the recovery of firms. An expansionary monetary policy

promotes firms’ recovery by lowering interest rates and improving their balance sheets. However,

RI
instead of stimulating recovery by easing firms’ financial constraints, loose fiscal policies impede

the recovery of firms with more tangible assets.

SC
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U
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