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Specialization, Productivity and Financing Constraints


  • Marquez, Robert

    (Boston University)

  • Yavuz, M. Deniz

    (Washington University in St Louis)


We analyze financial contracting when the specificity of investments is endogenous. Specialization decreases the liquidation value of assets, but it also improves a firm's long term productivity. While the first effect is known to make financing more difficult, we show that the second effect can ease financing constraints by improving an entrepreneur's incentive to pay. An entrepreneur's inability to commit to a given level of specialization introduces inefficiencies and may result in over or under specialization depending on which of the above effects dominates. The tradeoff we identify persists across various forms of specialized investments and generates new predictions. For example, we show that investment in human capital introduces a strategic incentive to specialize since entrepreneurs benefit from their investments even under liquidation.

Suggested Citation

  • Marquez, Robert & Yavuz, M. Deniz, 2010. "Specialization, Productivity and Financing Constraints," Working Papers 10-16, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:10-16

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    References listed on IDEAS

    1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    2. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    4. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    5. Stephen Brown & William Goetzmann & Bing Liang & Christopher Schwarz, 2008. "Estimating Operational Risk for Hedge Funds: The ?-Score," Yale School of Management Working Papers amz2559, Yale School of Management, revised 11 Sep 2009.
    6. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
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    Cited by:

    1. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 230-241.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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