Financial Constraints and Firm Dynamics

The ability of firms to access external financial resources represents a key factor in- fluencing several dimensions of firms’ dynamics. However, while recent qualitative evidence suggests the existence of heterogeneous and asymmetric reactions of firms to financing constraints (FC) problems, the literature on the empirics of size-growth dynamics focuses on the effects of FC on average growth rate and on the long term evolution of the firm size distribution. In this paper we extend the analysis to a wider range of possible FC effects on firm growth dynamics, including its autoregressive and heteroskedastic structure and the degree of asymmetry in growth shocks distribution. We measure FC with an official credit rating index, which directly captures the borrowers’ opinion about firm’s financial soundness deciding, in turn, the availability and cost of its external resources. Our broader investigation reveals that FC significantly affect firm’s performance and operate through several channels. In the short run, they reduce expected firm growth rate, induce anti-correlation in growth shocks and a milder dependence of growth rates volatility on size, and also operate through asymmetric “threshold effects”, either preventing potentially fast growing firms from enjoying attractive growth opportunities, or further deteriorating the growth prospects of already slow growing firms. The subdiffusive nature of the growth process of constrained firms is compatible with the observed differences in their size distribution.