Geographical proximity, nonlinearities and financial behaviour of firms. Does firm size matter?

The paper highlights the role played by nonlinearities and geographical proximity in an attempt to better understand the financial behaviour of firms. Our study focuses on three main financial dimensions: profitability, indebtedness and liquidity. A classical partial adjustment model is specified in order to capture the movements produced in each dimension. Using a large sample of Spanish industrial companies, located along the Mediterranean Basin, we evaluate the impact of nonlinearities, the heterogeneous behaviour of companies, and the importance of local networks. The impact of physical proximity is greater for small firms, which are more dependent on what happens in their neighbourhood. Moreover, the impacts are not homogeneous for the three financial ratios: we find that the effect of proximity is stronger for the profitability ratio than for indebtedness and liquidity.