Effects of Changes in the Business Cycle on Small Firms in the United States

Dr. Meir Tamari is an economist with the Bank of Israel in Jerusalem. The original research for this paper was conducted on behalf of the United States Small Business Administration. In view of the special characteristics of small firms the paper examines the importance of monitoring their behaviour at various points in the business cycle. Three related aspects of corporate behaviour - sales, profitability, and current liabilities - are studied. The hypothesis tested in the study is that small firms are adversely affected to a greater degree than are large firms in all three aspects. An examination is first made of whether small firms actually do react differently to changes in the business cycle than large firms and then an attempt is made to measure this quantitatively for forecasting purposes.