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Procedia Economics and Finance 14 (2014) 454 – 460

International Conference On Applied Economics (ICOAE) 2014

The impact of Financial Crisis on firm performance in case of

Greek food manufacturing firms
Ourania Notta*a and Aspasia Vlachveib
a
Alexander Technological Educational Institute of Thessaloniki, Dept. of Agricultural Technology, (Agricultural Economics Program),,
p.o.box 141, 57400, Thessaloniki, Greece
b
Technological Educational Institute of West Macedonia, Dept. of International Trade, 52100, Kastoria,Greece

Abstract

The aim of the paper is first to review both the academic and industry literature pertaining to the effects of economic crisis
on firm performance, second to improve our understanding about the performance of Greek food manufacturing firms
before and during the recent economic crisis in Greece and third to test whether significant profitability differences
between pre-crisis period and during crisis exists in the case of Greek dairy firms.
© 2014
© 2014 The Authors.
Published byPublished
Elsevier by Elsevier
Ltd. B.V.and/or
Selection This ispeer-review
an open access article
under under the CCofBY-NC-ND
responsibility license
the Organizing Committee of
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
ICOAE 2014
Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014
Keywords: economic crisis, firm performance, dairy firms, Greece

1. Introduction

The global financial crisis that erupted in August 2007, following the collapse of the US sub prime mortgage
market, initially had little impact on Greek financial markets. But in May 2010, in light of the rapid worsening
of the fiscal situation in Greece, the agreement between the Greek government and the International Monetary
Fund, the European Central Bank, and the European Commission, for a three-year, €110 billion adjustment
loan under which the Greek government committed to lower its fiscal deficit, lead to the implementation of
austerity measures. The implementation of this strict austerity program caused a substantial decrease in
demand for good and services pushing the Greek firms to a deep recession.

Taking into account that firm performance deteriorates during a crisis, to a certain extent, firm performance

*
Dr. Ourania Notta Tel. 00302310013319
E-mail address:ournotta@farm.teithe.gr

2212-5671 © 2014 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
Selection and/or peer-review under responsibility of the Organizing Committee of ICOAE 2014
doi:10.1016/S2212-5671(14)00734-5
 Ourania Notta and Aspasia Vlachvei / Procedia Economics and Finance 14 (2014) 454 – 460 455

will be impacted by the crisis. This work tries first to review both the academic and industry literature
pertaining to the effects of economic crisis on firm performance, second to improve our understanding about
the performance of Greek food manufacturing firms before and during the recent economic crisis in Greece
and to test whether significant profitability differences between pre-crisis period and during crisis exists in the
case of Greek dairy firms. The paper is organized as follows: In Section 2 the literature review about the
effects of economic crisis on firm performance is briefly reviewed. Section 3 describes the Greek dairy
industry and the data set that is used. The section ends with the presentation of a model of firm profitability
which explains the relation between profitability and firm financial variables. In Section 4 the method of
analysis and paper’s empirical results are presented and Section 5 offers some concluding remarks.

2. Literature review

A number of recent papers have studied firms’ performance during the 2008–09 crisis and how various factors
propagated the shocks. Claessens, et al. (2011) examine the performance of manufacturing firms in 42
countries and find that the crisis had a bigger negative impact on firms with greater sensitivity to aggregate
demand and international trade. Also using cross-country data, Laevena and Valencia (2011) find that the
growth of firms more dependent on external financing was more positively affected by bank recapitalization
and stimulus fiscal policies. Bricongne et al. (2012) using a sample of French firms showed that the effect of
crisis on large firms has been mainly at the intensive margin and has affected less the products being offered
to export destinations.

There is rich literature (Mitton, 2002; Lemmon and Lins, 2003; Baek et al .2004) that draw attention to
attributes of corporate governance and their influence on the performance of firms during the crisis. Other
researchers have investigated whether better corporate governance impacts the performance of family versus
non-family firms during the crisis (Aldamen et al. 2011 and Chaston, 2012). Their results prove that better
governance, irrespective of whether the firm is family or non-family, is associated with better accounting and
market performance during the crisis, while Chaston (2012) prove that family-owned hotels outperformed
nonfamily businesses. Family-owned hotels which enjoyed sales growth during the recession were those
which exhibited an entrepreneurial orientation and strategic flexibility. In another work, Sufian and
Habibullah (2010) tried to investigate the impact of financial crisis on Indonesian banks’ profitability and they
found that income diversification and capitalization were positively related to bank profitability. Erkens et al.
(2012) proved that corporate governance had an important impact on firm performance during the crisis
through influencing firms’ financing policies. Also, their findings show that firms with more independent
boards and greater institutional ownership experienced worse stock returns during the crisis period.

Others like Lucky and Minai (2012) and Little et al. (2011) studied the effect of individual determinant,
external factor and firm characteristics on small firm performance during crisis. Prior research has studied
also the relationship between financial leverage and firm performance (Opler and Titman, 1994; Safieddine
and Titman, 1999; Jandik and Makhija, 2005). Opler and Titman (1994) find that the relationship between
firm performance and financial distress is negative and significant, while Asgharian (2002) tests the
performance-distress relationship using Swedish firms and finds that highly leveraged firms in distressed
industries face relatively lower stock returns. Jandik and Makhija (2005) examined the effects of debt and
debt structure on corporate performance and found that the relation between corporate performance and
leverage is negative. In contrast, Bergstrom and Sundgren (2002), using financially distressed firms in
Sweden, found that that relationship is negligible.

Emilia Garcia-Appendini and Judit Montoriol-Garriga (2012) employ a differences-in-differences approach in

which they compare the trade credit supplied by firms before and after the start of the crisis as a function of
456 Ourania Notta and Aspasia Vlachvei / Procedia Economics and Finance 14 (2014) 454 – 460

their liquidity positions. Their results prove that firms with high pre-crisis liquidity levels experienced higher
performance as compared to ex-ante cash-poor firms. Research by Calomiris, et al.(1995) and Nilsen (2002)
showed that during recessions, liquidity in the form of trade credit flows from firms having access to the
markets for commercial paper or long-term debt to firms without access to these financial instruments. This
work aims to fill the existing gap in the literature concerning the effects of recent Greek financial crisis on
performance of Greek food manufacturing firms, using firm level data for the periods before and during crisis.

3. Data and Methodology

In order to achieve the above research aims we focus on the analysis of Greek dairy industry. Nearly all firms
of the sample produce products that are classified into the same three digit industry (dairy, NACE 155) since
their principal product is milk. The Greek dairy industry is the third most important and dynamic industry of
the food and drink processing sector, in terms of production value (17%) and in terms of gross value added
(15.5%) in 2009 (IOBE, 2014). Also, the sector represents 20 percent of food and drink industry sales,
conquering the first position in the sector. Greek dairy industry consists of a large number of firms, different
in size and contribution to the sector. The number of large, and well-organised dairies is rather small, however
these firms cover an important part of domestic market, exist for a long time in the sector and their products
have a very good reputation with strong brands. The majority of the companies that operate in the industry are
small family diaries with low productive capacity. These companies operate locally and do not affect the
demand seriously. In the industry there are also some importing companies with large market share and
widely known branded products.

We collected annual balance sheet data for 128 large dairy firms for the period 2006-2011 that account for
about 85 per cent of dairy production. The sample consists of all dairy firms with size greater than 10
employees. Annual data for each company are drawn from the balance sheets and income statements. In
contrast to other countries where firm level data are confidential, Greek manufacturing firms are obliged to
publish their annual balance sheets and income statements. The relevant data are available on an annual basis
from proprietary service companies ICAP and HELLASTAT. The data consist of detailed financial statements
of the firms, which allow us to calculate the selected financial indicators. Selected financial indicators have
been calculated from raw accounting data.

The following model has been formulated to identify and quantify the factors that explain profitability of
dairy manufacturing firms operating in Greece, by using panel data analysis over the period 2006-2011:

PR=a0 +a1MS +a2KS+a3LIQ +a4LEV +a5NWFA

• Where PR is the profitability variable and is measured as the ratio of gross profits over turnover
• MS is market share, is measured as the annual ratio of the firm’s sales over the industry sales,
• KS is the ratio of total assets over sales
• LIQ is the liquidity index and is given by the ratio of current assets minus inventories to total assets
• LEV is the leverage index (Indebtedness) and is measured as the ratio of short liabilities to total
assets
• NWFA is the equity coverage of fixed assets index and is given by the ratio of net worth to fixed
assets showing the ability of a firm to cover long run investment by its own capital

The effect of the size variable (ms) is expected to show the superior performance of the large firms. As the
dairy market is oligopolistic with few firms to dominate the market, then the few leaders apply their own
strategies (e.g. product development, advertising, sales promotion, diversification) and the other firms follow.
This provides a comparative advantage to the leading firms that result in an increase of their profit margin
 Ourania Notta and Aspasia Vlachvei / Procedia Economics and Finance 14 (2014) 454 – 460 457

which is greater than the small ones (Oustapassidis, 1998). It is expected that higher the capital intensity the
higher the profitability, as the higher the ratio of capital to sales, the more efficient the use of the capital by
the management of the firm.

The higher the leverage ratio, the greater the risks associated with the probability of default by the firm, while
lower leverage generally indicates greater financial security. However, Value-Maximization theory suggests
the existence of optimal leverage for a firm (Copeland and Weston, 1983), which is determined by the trade-
offs between the benefits of borrowing and the associated risks. The ability of firms to convert assets into cash
(LIQ) may also impact on performance as resources can quickly be used to respond to profit opportunities.

If the ratio of net worth to fixed assets is high, the firm can cover its long-term investment requirements from
its own capital. Since this capability minimizes the risk of losing capital assets, its consequence is easier
funding to achieve a further increase in sales. Thus we expect the impact of this index on profitability to be
positive.

Table 1 presents the descriptive data for 2006-2011. According to the table, profitability, liquidity and
leverage increase until 2009 and then profitability decreases substantially from 34% in 2009 to 19% in 2011,
liquidity decreases too from 35% in 2009 to 29% in 2011. Leverage is still at high levels in 2010 and there is
a small decrease in 2011.

Table 1. Profitability and financial variables per year, 2006-2011.

Profitability Total assets/ Liquidity Leverage Net worth/

Year
Sales Fixed assets

2006 0.29 1.27 0.28 0.33 0.62

2007 0.35 1.19 0.27 0.34 0.56
2008 0.36 1.33 0.26 0.31 0.48
2009 0.34 1.03 0.35 0.43 0.67
2010 0.28 1.15 0.30 0.43 0.74
2011 0.19 1.52 0.29 0.40 0.79
a.The figures are estimated for the group as a whole, e.g., The figures of the first column show the ratio of gross profits over sales.

To test whether significant profitability differences between pre-crisis and during crisis exists in the case of
Greek dairy firms we estimated the same model for pre-crisis group and during crisis separately. Then we
applied Chow-test to examine whether the respective coefficients obtained from the two samples are
statistically different.

4. Results

In this section we provide a short explanation of results. The results of the analysis are summarized in Table
2. The application of Hausman test (see Greene, 2008, chapter 9) for fixed effects or random effects (it
basically tests whether the unique errors (ui) are correlated with the repressors, the null hypothesis is they are
not) in the case of the two groups (pre-crisis and during crisis) shows that the random effect model is the
appropriate estimation method for the model (H=3.64, d.f. =5, p=0.61 and H=5.61, d.f. =5 p=0.35),
respectively. “In a random effects model, the unobserved variables are assumed to be uncorrelated with (or,
more strongly, statistically independent of) all the observed variables.”
458 Ourania Notta and Aspasia Vlachvei / Procedia Economics and Finance 14 (2014) 454 – 460

In order to examine whether the respective coefficients obtained from the two groups are statistically
different, we applied Chow-test. The null hypothesis in this case is structural stability; if we reject the null
hypothesis, it means we have a structural break in the data. The estimated value for the Chow-test is found
F*= 30.61 while the theoretical value of F for v1=6 and v2=366-(2x6) =354 degrees of freedom is 2.80. Thus,
F*>F.01 shows that, the coefficients of the variables are different in the two groups and we do have a
structural break in the data.

The first model simply explains profitability differences, among the dairy firms prior crisis period. According
to our results only market share is statistically significant with a positive impact (as it was expected), showing
that the larger the size of a firm is, the greater the level of profitability is among the dairy firms. All the other
financial variables employed in our model found to have insignificant effect on profitability which shows that
dairy firm’s performance pro-crisis was not depending on financial capability but maybe on the competitive
strategies pursued dairy firms.

Table 2. Determinants of profitability in Greek dairy firms, 2006-08 & 2009-11

2006-2008 2009-2011
Variables Random Effects estimates of Profitability
C 0.35 (4.26)** 0.20 (3.91)**
MS 1.02 (2.24)** 1.23 (2.32)**
KS -0.25 (-1.28) 0.003 (0.33)
LIQ -0.18 (-1.44) 0.15 (1.80)*
LEV -0.12 (-1.47) -0.16 (-2.26)**
NWFA -0.01 (-0.68) -0.003 (-0.50)
SSR 0.8985582 1.554396
F* test 30.61
(Chow Test)
Hausman Test 3.64 5.61
5df (0.61) 5df (0.35)
2
R 0.81 0.82
Adj. R2 0.56 0.71
Number of observation 132 234
1: t-ratios in parentheses
2: * and ** denote statistical significance at 5% and 1% level, respectively.

The results for the second group show that market share, liquidity and leverage have significant effect on
profits and explains profitability differences among the firms. The coefficients of market share is again
positive and significant, which proves that even during crisis firms with large market share and loyal
customers are more competitive and profitable. The coefficient of liquidity is also positive and significant (at
5% level of significance) during economic crisis, which shows that liquidity during downturns is essential for
the survival and competitiveness of dairy firms which have the ability to earn profits. The coefficient of
leverage is negative and significant as it was expected. These results show that, during crisis, the large dairy
firms with adequacy liquidity and low borrowing levels are more profitable than the other firms.

5. Conclusions

The paper tries to assess the effect of the economic crisis on firm performance in Greek dairy firms. We
collected annual balance sheet data for 128 large dairy firms for the period 2006-2011 and we calculated the
selected financial indicators. According to the descriptive data, there is a change in these indicators from 2009
and later which may shows the existence of a structural break. In order to identify and quantify the factors that
explain profitability of dairy manufacturing firms operating in Greece, we used panel data analysis over the
 Ourania Notta and Aspasia Vlachvei / Procedia Economics and Finance 14 (2014) 454 – 460 459

period 2006-2011 and we formulated a model with market share, capital intensity, liquidity, leverage and
equity coverage of fixed assets index. To test whether significant profitability differences between pre-crisis
and during crisis exists in the case of Greek dairy firms we estimated the same model for pre-crisis group and
during crisis separately. Our results show that before crisis only market share affect positively and statistically
significant profitability of dairy firms showing that the larger the size of a firm is, the greater the level of
profitability is among the dairy firms. The results for the period during crisis show that market share, liquidity
and leverage have significant effect on profits and explains profitability differences among the firms. The
coefficients of market share is again positive and significant, which proves that even during crisis firms with
large market share and loyal customers are more competitive and profitable. The coefficient of liquidity is
also positive and significant (at 5% level of significance) during economic crisis, which shows that liquidity
during downturns is essential for the survival and competitiveness of dairy firms which have the ability to
earn profits. The coefficient of leverage is negative and significant as it was expected. The application of
Chow-test proved that the coefficients of the variables are different in the two groups and we do have a
structural break in the data.

Acknowledgements

This research is implemented through the Operational Program "Education and Lifelong Learning" and is co-
financed by the European Union (European Social Fund) and Greek national funds.

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