Firm Dynamics and Financial Development

Abstract

This paper studies the impact of cross-country variation in financial market development on firms’ financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms’ financial structure in the data and show that financial restrictions can account for the majority of the difference in growth rates between firms of different sizes across countries. ∗Arellano: arellano@econ.umn.edu; Bai: yan.bai@asu.edu; Zhang: jzhang@umich.edu. We thank V. V. Chari, Chris House, Patrick Kehoe, Narayana Kocherlakota, Ed Prescott, Vincenzo Quadrini, and Richard Rogerson for useful comments and suggestions. We thank Jacek Rothert for excellent research assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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@inproceedings{Arellano2008FirmDA, title={Firm Dynamics and Financial Development}, author={Cristina Arellano and Yan Bai and Jing Zhang and Richard Rogerson}, year={2008} }