Financial Markets and Firm Dynamics

Abstract

Recent studies have shown that the dynamics of firms (growth, job reallocation, and exit) are negatively correlated with the initial size of the firm and its age. In this paper we analyze whether financial factors, in addition to technological differences, are important in generating these dynamics. We introduce financial-market frictions in a basic model of industry dynamics with persistent shocks and show that the combination of persistent shocks and financial frictions can account for the simultaneous dependence of firm dynamics on size (once we control for age) and on age (once we control for size).

Firm Growth and Liquidity Constraints: A Dynamic Analysis

“…Despite a growing body of literature investigating the role of financial constraints on firm perfo rmance, empirical studies on the effect of financ ing constraints over firm growth are scarce (Kumar, Rajan and Zingales (1999), Carpenter and Petersen (2002), and Cooley and Quadrini (2001) for the US; Elston 3 However, the quantitative size of the departure is typically small. Scherer and Ross (1990:144) reach the conclusion that recent studies find only a "weak" correlation between growth rates and size.…”

Why does capital structure choice vary with macroeconomic conditions?

“…Moreover, by Assumption 4 managers can not shortsell shares of different managers. 15 The manager maximizes utility, equation (1), with respect to c j 0 , c j 1 , i j , b j and s j subject to the budget constraints…”

“…When state prices are sufficiently low, the manager may do better by smoothing consumption through liquidation since the market does not place much value on the resulting losses. 15 If managers can short sell, the assumption of identical shocks would allow them to completely undo the problem of inefficient risk sharing (also see Section 3.2).…”

“…The focus of the macroeconomic analysis in Biais and Casamatta (1999) is on the relation between capital structure and exogenous shocks to the severity of agency problems. Cooley and Quadrini (1998), (1999) do consider heterogeneous firms that issue both debt and risky equity. However, the model imposes restrictions on the types and timing of security issues.…”

Bankruptcy choice with endogenous financial constraints

“…The paper is related to the vast literature on financial markets and firm dynamics pioneered by Cooley and Quadrini (2001), where information and enforcement frictions in financial contracting have implications for the entry, growth and exit of firms. In particular, we borrow heavily from recent developments in the theory of dynamic financial contracting.…”