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Financial Markets and Firm Dynamics

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  • Thomas F. Cooley
  • Vincenzo Quadrini

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).

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.5.1286
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 5 (December)
Pages: 1286-1310

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:5:p:1286-1310

Note: DOI: 10.1257/aer.91.5.1286
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  13. Albuquerque, R. & Hopenhayn, H.A., 1997. "Optimal Dynamic Lending Contracts with Imperfect Enforceability," RCER Working Papers 439, University of Rochester - Center for Economic Research (RCER).
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