CAPITAL MARKETS IMPERFECTIONS AND MARKUPS CYCLICALITY: AN EMPIRICAL ANALYSIS ON FIRM LEVEL DATA IN ITALY

In this paper the cyclical behaviour of markups in presence of imperfect capital markets has been analysed from an empirical point of view. A markup equation has been estimated including among regressors a leverage variable. This approach is based on the hypothesis that more leveraged firms have a lower level of internal net worth and are more likely to be affected by problems induced by capital market imperfections. The empirical analysis has been conducted on a panel of 1168 Italian manufacturing firms observed over the period 1977-1993. Overall results suggest the existence of financial constraints which induce firms to reduce markups; since this incentive is higher during recessions, it seems that capital market imperfections have a procyclical impact on markups.