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Financing Constraints and Corporate Growth

Author

Listed:
  • Winston Moore
  • Roland Craigwell

Abstract

This paper analyses the dynamic investment and growth prospects of a financially constrained firm. Three types of financing constraints are examined: internal finance, debt ceiling and exponential interest costs. To study the growth dynamics of firms subject to the above constraints, numerical solutions, for assigned parameter values, are provided using the reverse shooting Runge-Kutta algorithm. The simulation results suggest that the firm"s real and financial variables are highly correlated for constrained firms, as the optimal policy of these businesses is to over-invest in capital in the initial years, and then deplete this excess capacity in future periods. This, however, results in slower rates of growth for the constrained firm, and for entities facing a debt ceiling, greater rates of fluctuation in their rates of expansion

Suggested Citation

  • Winston Moore & Roland Craigwell, 2004. "Financing Constraints and Corporate Growth," Computing in Economics and Finance 2004 25, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:25
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    File URL: http://repec.org/sce2004/up.18680.1075837229.pdf
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    References listed on IDEAS

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    1. Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2003. "Comparative Analysis of Firm Demographics and Survival: Micro-Level Evidence for the OECD Countries," OECD Economics Department Working Papers 348, OECD Publishing.
    2. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    3. Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2005. "Comparative analysis of firm demographics and survival: evidence from micro-level sources in OECD countries," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 14(3), pages 365-391, June.
    4. Austan Goolsbee & David B. Gross, 1997. "Estimating Adjustment Costs with Data on Heterogeneous Capital Goods," NBER Working Papers 6342, National Bureau of Economic Research, Inc.
    5. Holger Strulik, 1999. "A Financial Theory of Firm Growth," Quantitative Macroeconomics Working Papers 19910, Hamburg University, Department of Economics.
    6. Demirguc-Kunt, Ash & Maksimovic, Vojislav, 1996. "Stock Market Development and Financing Choices of Firms," The World Bank Economic Review, World Bank, vol. 10(2), pages 341-369, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financing Constraints; Corporate Growth;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • 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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