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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26139

Title: A Theory of Financing Constraints and Firm Dynamics
Authors: Clementi, Gian Luca
Hopenhagn, Hugo
Keywords: Optimal Contract
Borrowing Constraints
Moral Hazard
Survival
Issue Date: May-2002
Series/Report no.: EC-04-25
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.
URI: http://hdl.handle.net/2451/26139
Appears in Collections:Economics Working Papers

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