Markups, Lack of Financing and Business Structures
by Andrés Bellofatto, Begoña Domínguez, Patrick Elkington and Alicia Rambaldi
Abstract: This paper studies the link between borrowing constraints and firm-level markups using administrative data of the near universe of Australian firms. We concentrate on privately-held firms (approximately 97% of the sample), and construct different measures of borrowing-constraint tightness using survey questions (for a subsample) and tax return data (for the full sample). Within the subsample, we use managers’ responses to define a binary indicator of whether a firm is financially constrained. Within the full sample, we build intensive measures of asset-based as well as earnings-based borrowing-constraint tightness. We find that tighter borrowing constraints lead to significant increases in firm-level markups for young and small firms. For example, being financially constrained increases markups by more than 20% among young and small firms. This effect, however, decreases with firm age and size. We also build a theoretical model showing that the empirical link between borrowing constraints and markups can be rationalized through working capital requirements.