Fitness Versus Fatness: Productivity, Financial Conditions, and the Survival of New Canadian Manufacturing Firms

Posted: 10 Sep 2009

See all articles by Kim P. Huynh

Kim P. Huynh

Government of Canada - Bank of Canada; Indiana University Bloomington - Department of Economics

Robert J. Petrunia

Lakehead University - Department of Economics

Marcel C. Voia

Carleton University

Date Written: September 9, 2009

Abstract

The recent economic and financial crisis highlights the role of balance sheets on firm survival. This paper considers the role of initial financial leverage (debt-to-asset ratio) on the survival of entrant Canadian manufacturing firms. Due to limited data availability, little is known about how financing affects the performance of young, private firms. This study utilizes a unique administrative dataset, T2LEAP, which contains employment and balance sheet information for all incorporated Canadian firms. We find that there is a non-monotonic relationship between leverage and firm exit (hazard) rate. The hazard rate decreases as leverage increases up to the four quintile of the leverage distribution and then increases for firms in the top leverage quintile. These effects are present while controlling for: firm characteristics, such as size and labour productivity; industry conditions, such as the real exchange rate, the differential US-Canada tariff rates, entry penetration, and the capital-labour ratio; and aggregate conditions in terms of the yield gap.

Keywords: firm survival, financial leverage, productivity, duration models

JEL Classification: C41, C14, D21, L60

Suggested Citation

Huynh, Kim P. and Petrunia, Robert J. and Voia, Marcel C., Fitness Versus Fatness: Productivity, Financial Conditions, and the Survival of New Canadian Manufacturing Firms (September 9, 2009). Available at SSRN: https://ssrn.com/abstract=1470869

Kim P. Huynh (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Robert J. Petrunia

Lakehead University - Department of Economics ( email )

Thunder Bay, P7B 5E1
Canada

Marcel C. Voia

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,291
PlumX Metrics