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Financial Markets and Firm Dynamics

Author

Listed:
  • Thomas F. Cooley
  • Vincenzo Quadrini

Abstract

Recent studies have shown that the dynamics of firms (growth, job relocation and exit) are negatively associated with the firm's size. In this paper we analyze whether financial factors are important in generating this negative relation. We develop a model in which, at each point in time, firms are heterogeneous in the amount of equity, and the equity affects their financing decision. The production and investment behavior of small and large firms differs substantially, and the model replicates many of the key features of industry evolution: smaller firms experience faster growth, higher rates of job creation and destruction and lower survival rates. *We have received helpful comments and suggestions from Jeff Campbell, David Chapman, Hal Cole, Tom Cosimano, Joao Gomes, Hugo Hopenhayn, Jose-Victor Rios-Rull, and Harald Uhlig. This research is supported in part by NSF Grant SBR 9617396.

Suggested Citation

  • Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:99-14
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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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