A Theory of Financing Constraints and Firm Dynamics

Gian Luca Clementi and Hugo Hopenhayn

No 492, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: There is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival. In this paper we model a multi-period borrowing/lending relationship with asymmetric information. We show that borrowing constraints emerge as a feature of the optimal long-term lending contract, and that such constraints relax as the value of the borrower's claim to future cash-flows increases. We also show that the optimal contract has interesting implications for firm dynamics. In agreement with the empirical evidence, as age and size increase, mean and variance of growth decrease, firm survival increases, and the sensitivity of investment to cash-flows declines.

Keywords: Optimal Contract; Borrowing Constraints; Moral Hazard; Survival. (search for similar items in EconPapers)
JEL-codes: D82 G32 L14 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2002-06
New Economics Papers: this item is included in nep-ent and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://rcer.econ.rochester.edu/RCERPAPERS/rcer_492.pdf full text (application/pdf)
None

Related works:
Working Paper: A Theory of Financing Constraints and Firm Dynamics (2004)
Working Paper: A Theory of Financing Constraints and Firm Dynamics
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:roc:rocher:492

Access Statistics for this paper

More papers in RCER Working Papers from University of Rochester - Center for Economic Research (RCER) University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by Richard DiSalvo ( this e-mail address is bad, please contact ).