Liquidity Constraints, Competition, and Markup Cyclicality

2016. Financial Management. Volume 45, Issue 3, Pages 769-802. https://doi.org/10.1111/fima.12121

Claudio Raddatz K, Matías Braun

Abstract:

This article provides evidence on the relation among financial constraints, competition, and the cyclicality of markups. Based on a long series of industry data from a large number of countries, we find that markups increase in conjunction with the business cycle in environments with higher short‐term financial constraints (liquidity constraints) and more competition. The evidence also suggests that these two elements complement each other: the procyclicality of markups in firms facing both high competition and high liquidity constraints is higher than that explained by each determinant independently.

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