A Financial Theory of Firm Growth

Holger Strulik ()

Quantitative Macroeconomics Working Papers from Hamburg University, Department of Economics

Abstract: The paper analyses dynamic investment behaviour and labour demand of the financially restricted firm. It shows that firm development is characterised by a negative correlation between leverage and the stocks of capital and labour but a positive correlation between leverage and investment and labour hiring. The paper explains why firm growth is decreasing with firm size and age, and why a corporate tax cut leads to a lower debt equity ratio, higher employment and an overshooting dividend ratio. A calibrated version of the model also calculates the welfare implications for shareholders.

Date: 1999-10
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