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Financial Frictions, Cyclical Fluctuations, and the Growth Potential of New Firms

Christoph Albert () and Andrea Caggese ()

No 1067, Working Papers from Barcelona Graduate School of Economics

Abstract: We develop a model in which entrepreneurs choose between startup types with heterogeneous short- and long-run growth potential, and we generate testable predictions on the differential effects of financial factors and cyclical fluctuations on these startups. Using a multi-country entrepreneurship survey, we find that, consistent with the model, higher borrowing costs during financial crises negatively affect high-growth startups considerably more than low-growth startups, especially during severe downturns. Our results, supported by additional tests using sector-level financial frictions indicators, uncover a new channel that is potentially important to explain slow recoveries after financial crises.

Keywords: financial crisis; entrepreneurship (search for similar items in EconPapers)
JEL-codes: E20 E32 D22 J23 M13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-fdg, nep-lma, nep-mac and nep-sbm
Date: 2018-12
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Working Paper: Financial frictions, cyclical fluctuations, and the growth potential of new firms (2018) Downloads
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