American Economic Review Vol. 91 No. 5 2001

Financial Markets and Firm Dynamics

Thomas F. Cooley¹; Vincenzo Quadrini²

¹ Department of Economics, Stern School of Business, New York University, 44 West Fourth Street, New York, NY 10012. · ² Department of Economics, Stern School of Business, New York University, 44 West Fourth Street, New York, NY 10012, Centre for Economic Policy Research (CEPR).

Abstract

Recent studies have shown that the dynamics of firms (growth, job reallocation, and exit) are negatively correlated with the initial size of the firm and its age. In this paper we analyze whether financial factors, in addition to technological differences, are important in generating these dynamics. We introduce financial-market frictions in a basic model of industry dynamics with persistent shocks and show that the combination of persistent shocks and financial frictions can account for the simultaneous dependence of firm dynamics on size (once we control for age) and on age (once we control for size).

DOI

10.1257/aer.91.5.1286

Volume

91

Issue

5

Pages

1286-1310

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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