A Theory of Financing Constraints and Firm Dynamics

Gian Luca Clementi and Hugo Hopenhayn

No 2002-E9, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

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.

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Related works:
Working Paper: A Theory of Financing Constraints and Firm Dynamics (2004)
Working Paper: A Theory of Financing Constraints and Firm Dynamics (2002)
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