Factor demands, effective discount rates, and liquidity constraints in theretail trade firm

This is a firm-level empirical study of the impact of credit market frictio ns on Fmr factor demands. It extends previous work in two ways: it studies die impact of liquidity constraints on both fixed investment and employment and examines data on retail firms. Using the Euler equation approach, it f inds strong evidence for the impact of financial constraints on factor dema nds. Estimated relationships in turn induce striking countercyclical moveme nts in effective discount rates of firms with limited access to credit. The article concludes that the results found in previous work regarding excess sensitivities of investment to liquidity are indeed due to liquidity const raints. (JEL E32, E44, E22).