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Risk, Financial Development and Firm Dynamics

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Abstract

I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows the model to better explain the relation between financial and economic development.

Suggested Citation

  • Bernardo Morais, 2015. "Risk, Financial Development and Firm Dynamics," International Finance Discussion Papers 1134, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1134
    DOI: 10.17016/IFDP.2015.1134
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    More about this item

    Keywords

    productivity; misallocation; financial frictions; learning;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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