Risk, Financial Development and Firm Dynamics

Bernardo Morais
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Bernardo Morais: https://www.federalreserve.gov/econres/bernardo-c-morais.htm

No 1134, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows the model to better explain the relation between financial and economic development.

Keywords: productivity; misallocation; financial frictions; learning (search for similar items in EconPapers)
JEL-codes: O11 O40 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-05-06
New Economics Papers: this item is included in nep-bec, nep-cse and nep-dge
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http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1134.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2015.1134 http://dx.doi.org/10.17016/IFDP.2015.1134 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1134

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