Financing Frictions and the Real Economy

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Colorado
Hosted By: American Finance Association
  • Chair: David Matsa, Northwestern University

Corporate Investment and Innovation in the Presence of Competitor Constraints

William Grieser
Tulane University
Zack Liu
University of Texas-Austin


We study the relation between investment behavior and competitor financial constraints. Using inter-firm patent citations and text-based product market similarities to identify intransitive competitor networks, we find that firms increase investment spending, patenting activity, and employee poaching when competitor constraints become more binding. In addition, firms shift their investment composition (product market and patent portfolios) towards competitors who experience a relative tightening of constraints. These effects are robust to controlling for selection and correlated effects across competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor constraints and find similar effects.

Can Paying Firms Quicker Affect Aggregate Employment?

Jean-Noel Barrot
Massachusetts Institute of Technology
Ramana Nanda
Harvard University


In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the US. We study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, we find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, we document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Our results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes.

Aggregate Effects of Collateral Constraints

Thomas Chaney
Toulouse School of Economics
Zongbo Huang
Princeton University
David Sraer
University of California-Berkeley
David Thesmar
Massachusetts Institute of Technology and CEPR


This paper provides a quantitative exploration of the aggregate effects of an important
source of financing friction, collateral constraints. We develop a general equilibrium model
of firm dynamics with collateral constraints and adjustment costs, which we structurally
estimate using administrative data on French firms. The model is estimated using the joint
firm-level dynamics of capital and labor observed following exogenous shocks to the value of
collateral. We find that welfare increases by 5.4% when collateral constraints are removed.
25% of these welfare gains come from an improved allocation of inputs across heterogenous
firms; 75% are derived from an aggregate increase in capital. Interestingly, removing collateral constraints has little effect on aggregate employment, as financially constrained firms tend to substitute labor for capital.
Filippo Mezzanotti
Northwestern University
Eric Zwick
University of Chicago
Anthony A. DeFusco
Northwestern University
JEL Classifications
  • G3 - Corporate Finance and Governance