American Economic Review: Vol. 91 No. 5 (December 2001)


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Financial Markets and Firm Dynamics

Article Citation

Cooley, Thomas F., and Vincenzo Quadrini. 2001. "Financial Markets and Firm Dynamics." American Economic Review, 91(5): 1286-1310.

DOI: 10.1257/aer.91.5.1286


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).

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Cooley, Thomas F. (NYU)
Quadrini, Vincenzo (NYU and CEPR)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
D21: Firm Behavior
G31: Capital Budgeting; Fixed Investment and Inventory Studies

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