Essays on Firm Growth and Financing

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The unifying theme of this dissertation is the behaviour of firms over their life cycle, namely regarding their financing and growth, and its macroeconomic implications. My thesis starts from a general question: how should we allocate financial resources to young firms over their first years of activity? On one side, young firms are often small, which may prevent them from accessing financial markets. On the other side, in some sectors, there is high uncertainty regarding the underlying quality of young firms. These issues might deter productive firms from growing over life. Nevertheless, those firms are worth financing from an aggregate perspective. Exploring the conditions under which productive young firms can flourish is a first-order issue to promote a well-functioning productive sector and a good economy-wide performance. Chapter 1 of this dissertation uses micro data on Spanish companies to study the life-cycle behaviour of firm productivity and factor inputs. I find evidence that some firms are expected to grow strongly when young. Moreover, factor input data points to firm-level frictions affecting resource allocation to firms over life. Motivated by empirical findings in Chapter 1, I build a firm-dynamics model in Chapter 2 to study whether firms with a high growth potential at birth manage to realise high growth, or whether they are deterred by the existence of firm-level frictions, namely borrowing constraints. This chapter addresses the firm-level effects of borrowing constraints, as well as their aggregate impact on the Spanish economy. Chapter 3 studies how young, innovative firms make investment, liquidation and sale decisions in a context of high uncertainty. I show that a model where firms learn about their uncertain quality captures documented patterns in the venture capital literature, such as delayed exits and contingent stage financing. Chapter 1. A Life-Cycle Study of Productivity and Factor Allocation of Spanish Firms. The Spanish economy has recently experienced a poor aggregate performance accompanied by the prevalence of low-growth, small firms. This chapter relates these facts to the phenomenon of high-growth-potential firms. I use a rich micro-level dataset containing financial information on companies, and I perform a study of the evolution of firm-level productivity, employment and capital over the life cycle. First, I find that Spanish firms are heterogeneous in their expected growth rates. Second, I find that dynamic life-cycle moments in the data are informative about the allocation of factor inputs to companies, and thus about frictions affecting young firms. Chapter 2. Factor Misallocation and High-Growth Firms in Spain. Motivated by empirical patterns on the life-cycle evolution of productivity and input allocations to firms, I study whether young firms are deterred from growing by borrowing constraints, and its macroeconomic implications. I develop a firm-dynamics general equilibrium model considering a firm-level productivity process and frictions. I calibrate two alternative models, with and without expected-growth-rate heterogeneity, to match data on input life-cycle allocations. In the model with heterogeneous expected growth, high-growth-potential firms are prevented from growing by financial frictions, and eliminating borrowing constraints generates large aggregate gains. In the model without this source of heterogeneity, there are less high-growing firms and aggregate effects from removing financial frictions are smaller. Chapter 3. Venture Capital Investments and Learning over the Life Cycle. The life cycle of young, high-risk entrepreneurial projects and the financing of innovation has become increasingly important for economists, companies and policymakers.The objective of this chapter is to understand how high-risk firms learn over time about their unknown quality, and how this affects firm decisions and financing. I develop a model of the firm that imitates realistic features of young, high-risk companies, such as uncertainty about a firm’s own quality, staged financing, exit strategies, and the realisation of period cash-flows that yield information about the firm’s unobserved quality. The model captures empirical patterns of innovative firms documented in the venture capital literature – namely, delayed exit decisions and investments into companies being contingent on firm-level results over their life. I find that the ability to learn makes investment sensitive to period cash-flows in the model. A high initial quality uncertainty reflects into exit and investment strategies and may motivate firms to perform growth investments. In this context, a higher learning ability increases firm value substantially by motivating experimentation and contingent staged financing.
Economía, Teoría macroeconómica, Teoría de la inversión
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