A Theory of Financing Constraints and Firm Dynamics

Gian Luca Clementi () and Hugo A. 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)
New Economics Papers: this item is included in nep-ent and nep-mfd
Date: 2002-06
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Related works:
Working Paper: A Theory of Financing Constraints and Firm Dynamics
Working Paper: A Theory of Financing Constraints and Firm Dynamics (2004)
Journal Article: A Theory of Financing Constraints and Firm Dynamics (2006)
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