Firm Exit and Entry over the Business Cycle in Spain

Manuela Magalhâes () and Jesús Rodríguez-López ()
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Manuela Magalhâes: Universidad de Málaga
Jesús Rodríguez-López: Universidad Pablo de Olavide

No 25.02, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: Spanish aggregate productivity was negatively correlated with the business cycle from 2000 to 2014, but this correlation later turned positive between 2015 and 2019. In this paper, we ask if this change is related to financial restrictions and firm creation and destruction in Spain. Using firm- level administrative data, we reach the following conclusions. First, during the 2000–07 expansion, low-productivity firms with access to financial resources were able to continue operating; in turn, this led to a crowding-out of financial resources, and forced high-productivity but financially vulnerable firms to close. We find that on average exiting firms were significantly larger and more productive than entering firms, a situation that entailed productivity losses in this period. Second, following the tightening of credit conditions after 2008, we find a more efficient selection at both exit and entry margins: exiting firms were less productive than entering firms. Both findings help explain, at least in part, the change in the productivity-GDP correlation. Finally, in a counterfactual exercise we quantify the effects of type-I selection errors, i.e., the closure of productive but financially vulnerable firms: had market selection not presented type-I errors, relative total factor productivity at the exit margin would have been 3% to 6.5% higher, while gains in relative labor productivity would have ranged between 27% and 46%.

Keywords: Firm exit and entry; business cycle; cleansing effects; miss-selection; firm survival. (search for similar items in EconPapers)
JEL-codes: E23 E32 E44 G32 L11 L25 L60 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025
New Economics Papers: this item is included in nep-eec, nep-ent, nep-eur, nep-mac and nep-sbm
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