Financing Constraints And Firm Dynamics With Durable Capital
Source: Stony Brook University
The authors consider a dynamic financing problem of a firm subject to moral hazard problems. With respect to the existing literature (e.g. as Clementi and Hopenhayn and Quadrini), they enrich the model by introducing durable capital and a stochastic liquidation value. The existence of durable capital allows them to make predictions based on the firm size, independently of age, while the stochastic liquidation value makes it possible to have liquidation with positive probability under the first best. They find that a higher level of capital decreases the probability of liquidation, increases future size and reduces the average return and volatility of the firm. Also, under certain parameter values a stochastic liquidation value makes it possible to achieve the first best.