Financial constraints and firm dynamics
- 1.4k Downloads
This study analyzes the effect of financial constraints (FCs) on firm dynamics. We measure FCs with an official credit rating, which captures availability and cost of external resources. We find that FCs undermine average firm growth, induce anti-correlation in growth patterns and reduce the dependence of growth volatility on size. FCs are also associated with higher volatility and asymmetries in growth shock distributions, preventing young fast-growing firms especially from seizing attractive growth opportunities and further deteriorating the growth prospects of already slow-growing firms, particularly if old. The sub-diffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution.
KeywordsFinancial constraints Firm size distribution Firm growth Credit ratings Asymmetric exponential power distribution
JEL ClassificationsL11 C14 D20 G30 L26
The research leading to this work has received funding from the European Community’s Seventh Framework Programme (FP7/2007–2013) under Socio-economic Sciences and Humanities, grant agreement no. 217466. We also acknowledge financial support from the Institute for New Economic Thinking, INET inaugural grant no. 220 and the Italian Ministry of University and Research as a part of the PRIN 2009 program (grant protocol no. 2009H8WPX5). The authors wish to thank Alex Coad, Andrea Generale, Alessandra Guariglia, Luigi Guiso, Werner Holzl, Alan Hughes, Mariana Mazzucato, Franco Peracchi, Fabiano Schivardi, Sidney Winter and an anonymous referee for insightful comments to earlier drafts. We are also grateful to participants at the 2010 meeting of the European Association for Research in Industrial Economics (Istanbul, Turkey), those at the 2010 meeting of the European Economic Association (Glasgow, UK), those at the 2010 meeting of the International Schumpeter Society (Along, Denmark), and those at the DIME Workshop “Financial Constraints, Firm and Aggregate Dynamics” (Sophia-Antipolis, France). Useful discussions with participants to seminars at Scuola Superiore Sant’Anna, Pisa, Italy, at the University of Paris 1, Pantheon-Sorbonne, France, at the Einaudi Institute for Economics and Finance, Rome, Italy, at the European Central Bank, Frankfurt, Germany, and at the WIFO-Austrian Institute of Economic Research, Vienna, Austria, are also acknowledged. The usual disclaimers apply.
- Clementi, G. L., & Hopenhayn, H. A. (2006). A theory of financing constraints and firm dynamics. The Quarterly Journal of Economics, 121, 229–265.Google Scholar
- Devereux, M., & Schiantarelli, F. (1990). Investment, financial factors, and cash flow: Evidence from U.K. panel data, in Asymmetric information, corporate finance, and investment. Cambridge, MA: National Bureau of Economic Research, pp. 279–306.Google Scholar
- Fligner, M. A., & Policello, G. E. (1981). Robust rank procedures for the Behrens-Fisher problem. Journal of the American Statistical Association, 76, 141–206.Google Scholar
- Gibrat, R. (1931). Les inègalitès èconomiques. Paris: Librairie du Recuil Sirey.Google Scholar
- Istituto Nazionale di Statistica (ISTAT) (2005). Rapporto Annuale 2004. Rome: Istituto Nazionale di Statistica.Google Scholar
- Mansfield, E. (1962). Entry, Gibrat’s law, innovation, and the growth of firms. The American Economic Review, 52, 1023–1051.Google Scholar
- Pistaferri, L., Guiso, L., & Schivardi, F. (2010). Credit within the firm. NBER Working Papers 15924. Cambridge, MA: National Bureau of Economic Research.Google Scholar
- Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88, 559–586.Google Scholar