Financial Markets and Firm Dynamics

Thomas Cooley () and Vincenzo Quadrini ()

Working Papers from New York University, Leonard N. Stern School of Business, Department of Economics

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.

Date: 1999-09-13
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Journal Article: Financial Markets and Firm Dynamics (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:ste:nystbu:99-14

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