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A Theory of Financing Constraints and Firm Dynamics 

by Gian Luca Clementi and Hugo A. Hopenhayn

Quarterly Journal of Economics, Volume 121, Issue 1, February 2006, pages 229-265.

Paper (PDF Format)


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 and firm survival increases.

Notice: a previous version of this paper circulated under the title "Optimal Lending Contracts and Firms' Survival with Moral Hazard"

Working paper version available at Repec