Battle Scars. New Firms’ Capital, Labor, and Revenue Growth During the Double-Dip Recession

We study growth dynamics of firms before and during the financial crisis. We find that firms born during the recession display lower growth overtime in capital, employment and revenue, despite being more productive at entry than those born in normal times. We show that this pattern can be explained by credit market tightening, as measured by sector-level financial dependence and pre-crisis exposure to the interbank market. We argue that there may be two non-competing mechanisms that affect newborn firms during a financial crisis: firms enter with lower capital and, thus, face tighter collateral constraints; and banks select projects that are less risky, at the expenses of their future growth potential. We provide some evidence that both channels may play a role in explaining the observed pattern of firm dynamics