Financial Constraints and Firm Dynamics

The short run effects of financial constraints (FCs) on the expected growth rate of firms and their long-term implications on the evolution of the firm size distribution have been recently investigated by several scholars. In this paper we extend the analysis to a wider and largely unexplored range of possible FCs effects, including the autoregressive and heteroskedastic structure of the firm growth process and the degree of asymmetry in the distribution of growth shocks. We measure FCs with an official credit rating index which directly captures the borrowers’ opinion on a firm’s financial soundness and, consequently, the availability and cost of external resources. Our investigations reveal that FCs operate through several channels. In the short term, FCs reduce the average firm growth rate, induce anti-correlation in growth shocks and reduce the dependence of growth rates volatility on size. Financing constraints also operate through asymmetric threshold effects, both preventing potentially fast growing firms from enjoying attractive growth opportunities, and further deteriorating the growth prospects of already slow growing firms. The sub-diffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution. JEL codes: C14, D20, G30, L11 Corresponding Author: Giulio Bottazzi, Scuola Superiore Sant’Anna, E-mail: [email protected].