Financial Markets and Firm Dynamics
(joint with Thomas Cooley)

Recent studies have shown that the dynamics of firms (growth, job reallocation and exit) are negatively associated with the initial size of the firm and its age. In this paper we analyze whether
financial factors, in addition to technological differences, are important in generating these industry dynamics. We introduce financial market frictions in a basic model of industry dynamics
with persistent shocks and show how the combination of persistent shocks and financial frictions can account for the simultaneous dependence of the firm dynamics on size (once we control for age)
and on age (once we control for size). In contrast, models with only persistent shocks or financial frictions are unable to account simultaneously for the (conditional) size and age dependence.