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Firm dynamics and financial development

  • Arellano, Cristina
  • Bai, Yan
  • Zhang, Jing

Using comprehensive firm-level datasets, this paper studies the impact of cross-country variation in financial market development on firms' financing choices and growth. In less financially developed economies, small firms grow faster and have lower leverage than large firms. As financial development improves, the growth difference between small and large firms shrinks, while the leverage difference rises. The paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. The model explains the observed cross-country variations in firm size, leverage and growth in response to changes in financial frictions.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 6 ()
Pages: 533-549

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Handle: RePEc:eee:moneco:v:59:y:2012:i:6:p:533-549
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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