Not Available for Download

Is the Growth of Small Firms Constrained by Internal Finance?

Posted: 27 Mar 2001  

Bruce C. Petersen

Washington University in St. Louis - Department of Economics

Robert E. Carpenter

University of Maryland, Baltimore County (UMBC) - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Richmond

Abstract

This paper examines the long-standing theory that small firm growth is often constrained by the quantity of internal finance. Under plausible assumptions, when financing constraints are binding, an additional dollar of internal finance should generate slightly more than an additional dollar of growth in assets. This quantitative prediction should not hold for the relatively small number of firms with access to external equity. We test these predictions with a panel of over 1600 small firms and find that the growth of most firms is constrained by internal finance. Our results have implications for several different research literatures, including models of firm growth.

Keywords: Firm Growth, Investment, Finance, Small Firms, Equity Finance, Cash Flow

JEL Classification: LO, D9

Suggested Citation

Petersen, Bruce C. and Carpenter, Robert E., Is the Growth of Small Firms Constrained by Internal Finance?. Review of Economics and Statistics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=259864

Bruce Clayton Petersen

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5643 (Phone)

Robert E. Carpenter (Contact Author)

University of Maryland, Baltimore County (UMBC) - Department of Economics ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-6590 (Phone)
410-455-1054 (Fax)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Paper statistics

Abstract Views
2,816