A Theory of Financing Constraints and Firm Dynamics

34 Pages Posted: 31 Oct 2008

See all articles by Gian Luca Clementi

Gian Luca Clementi

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Hugo Hopenhagn

affiliation not provided to SSRN

Date Written: May 2002

Abstract

There is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival. In this paper we model a multi-period borrowing/lending relationship with asymmetric information. We show that borrowing constraints emerge as a featureof the optimal long-term lending contract, and that such constraints relax as the value of the borrower s claim to future cash flows increases. We also show that the optimal contract has interesting implications for firm dynamics. In agreement with the empirical evidence, as age and size increase, mean and variance of growth decrease, firm survival increases, and the sensitivity ofinvestment to cash-flows declines.

Keywords: Optimal Contract, Borrowing Constraints, Moral Hazard, Survival

Suggested Citation

Clementi, Gian Luca and Hopenhagn, Hugo, A Theory of Financing Constraints and Firm Dynamics (May 2002). NYU Working Paper No. EC-04-25, Available at SSRN: https://ssrn.com/abstract=1292193

Gian Luca Clementi (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

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Hugo Hopenhagn

affiliation not provided to SSRN

No Address Available

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