Financing Constraints and Corporate Growth

Winston Moore and Roland Craigwell

No 25, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper analyses the dynamic investment and growth prospects of a financially constrained firm. Three types of financing constraints are examined: internal finance, debt ceiling and exponential interest costs. To study the growth dynamics of firms subject to the above constraints, numerical solutions, for assigned parameter values, are provided using the reverse shooting Runge-Kutta algorithm. The simulation results suggest that the firm"s real and financial variables are highly correlated for constrained firms, as the optimal policy of these businesses is to over-invest in capital in the initial years, and then deplete this excess capacity in future periods. This, however, results in slower rates of growth for the constrained firm, and for entities facing a debt ceiling, greater rates of fluctuation in their rates of expansion

Keywords: Financing Constraints; Corporate Growth (search for similar items in EconPapers)
JEL-codes: C6 D9 G32 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cfn and nep-fin
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