A Theory of Financing Constraints and Firm Dynamics

Clementi, Gian Luca; Hopenhayn, Hugo A.

doi:10.2139/ssrn.314274

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A Theory of Financing Constraints and Firm Dynamics

AFA 2003 Washington, DC Meetings; NYU Stern 2004 Working Paper No. 04-25

34 Pages Posted: 12 Jun 2002

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 A. Hopenhayn

University of California, Los Angeles (UCLA) - Department of Economics

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 feature of 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 of investment to cash-flows declines.

JEL Classification: D82, G32, L14

Suggested Citation: Suggested Citation

Clementi, Gian Luca and Hopenhayn, Hugo A., A Theory of Financing Constraints and Firm Dynamics (May 2002). AFA 2003 Washington, DC Meetings; NYU Stern 2004 Working Paper No. 04-25, Available at SSRN: https://ssrn.com/abstract=314274 or http://dx.doi.org/10.2139/ssrn.314274