Bankruptcy and Firm Dynamics : The Case of the Missing Firms

Financial frictions have been documented as an important determinant of firm dynamics. In this paper I model bankruptcy procedures, liquidation in particular, as an institutional feature that affects both sides of financial transactions. I construct a model of firm dynamics that generate endogenous borrowing limits and I find that a) inefficient bankruptcy procedures can have quantitatively important aggregate effects, but more importantly; b) that such effects would not be directly visible in the firms that industrial censuses and surveys focus on. I conclude that to capture the effects of the legal framework we need to look beyond the existing firms.
Publication date: February 2010
ISBN: 9781451962932
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Finance , firm dynamics , financial constraints , bond , probability , equation , bond price , statistics

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