Financial Market Imperfections: Does it Matter for Firm Size Dynamics?

Kim Huynh and Robert Petrunia

No 428, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Recent theoretical work by Cooley and Quadrini (2001) highlight the role of financial frictions in models of firm dynamics. This paper investigates empirically the implications of the Cooley and Quadrini (2001) model for the determinants of firm size dynamics with special emphasis on financial frictions. Previous studies examine firm size dynamics conditional on a firm's age. This paper augments the firm size dynamics by considering the additional role of financial frictions, via a firm's debt-to-asset ratio. This paper utilizes data from the T2-LEAP, an administrative tax longitudinal database, which contains balance sheet and employment information on the universe of all incorporated manufacturing firms in Canada for the period 1985-1997. This paper examines the firm size dynamic relationship using dynamic panel data methodology discussed in Arellano (2002). Care is taken to control for the firm unobservables to get consistent estimates of the model. Another issue is the possibility of endogeneity between firm size and the debt-to-asset ratio. Findings show that accounting for firm unobservables is important and financial friction do matter to some firm size dynamics relationships

Keywords: Firm Dynamics; Leverage; Dynamic Panel Data (search for similar items in EconPapers)
JEL-codes: C23 D21 G3 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-ent, nep-fin and nep-fmk
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:428

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