FINNOV

Abstract: This paper analyses the effect of financial constraints (FCs) on firms’ dynamics. We measure FCs with an official credit rating which captures availability and cost of external resources. We find that FCs undermine firm growth, induce anti-correlation in growth shocks and reduce the dependence of growth volatility on size. FCs also associate with asymmetries in growth rates distributions, preventing potentially fast growing firms from seizing attractive growth opportunities, and furtherdeteriorating the growth prospects of already slow growing firms. The subdiffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution.

Keywords: Financial constraints, Firm size distribution, Firm growth, Credit ratings, Asymmetric exponential power distribution

JEL codes: C14, D20, G30, L11