Working Paper: NBER ID: w15193
Authors: Cristina Arellano; Yan Bai; Jing Zhang
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.
Keywords: financial development; firm dynamics; debt financing; growth rates
JEL Codes: E22; F2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less financially developed economies (O54) | small firms grow disproportionately faster than large firms (L25) |
| difference of 83 percentage points in the ratio of credit to GDP (F65) | 12 percentage points difference in growth rates between firms with asset shares of 0.01 and 0.00001 (L25) |
| less financially developed economies (O54) | small firms finance their assets with disproportionately less debt than large firms (G32) |
| 83 percentage points difference in the ratio of credit to GDP (E51) | 5 percentage points difference in leverage ratios across firms with asset shares of 0.01 and 0.00001 (G32) |