A Theory of Financing Constraints and Firm Dynamics
AbstractThere is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival. In this paper we model a multiperiod 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, and firm survival increases. Copyright (c) President and Fellows of Harvard College and the Massachusetts Institute of Technology..
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Bibliographic InfoArticle provided by MIT Press in its journal The Quarterly Journal of Economics.
Volume (Year): 121 (2006)
Issue (Month): 1 (02)
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Other versions of this item:
- Gian Luca Clementi & Hugo Hopenhayn, 2002. "A Theory of Financing Constraints and Firm Dynamics," RCER Working Papers 492, University of Rochester - Center for Economic Research (RCER).
- Gian Luca Clementi & Hugo Hopenhagn, 2004. "A Theory of Financing Constraints and Firm Dynamics," Working Papers 04-25, New York University, Leonard N. Stern School of Business, Department of Economics.
- Gian Luca Clementi & Hugo Hopenhayn, . "A Theory of Financing Constraints and Firm Dynamics," GSIA Working Papers 2002-E9, Carnegie Mellon University, Tepper School of Business.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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