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Misallocation and Financial Frictions: the Role of Long-Term Financing

Author

Listed:
  • Marios Karabarbounis

    (Federal Reserve Bank of Richmond)

  • Patrick Macnamara

    (University of Manchester)

Abstract

We analyze misallocation of capital in a model where firms face different types of financial constraints. Private firms borrow subject to a collateral constraint while public firms issue long-term bonds subject to default risk. We estimate our model using employment and financial statistics reflecting the overall distribution of firms in conjunction with firm-level data on credit spreads that we target for the set of public firms. In our model, a productive private firm is unable to grow fast if its collateral is limited. But a productive public firm can overcome its financial constraints because it faces low borrowing costs in the debt market, a relationship we also verify in the data. As a result, financial frictions for private firms disrupt investment behavior to a greater degree and generate a larger misallocation of resources relative to financial frictions for public firms. (Copyright: Elsevier)

Suggested Citation

  • Marios Karabarbounis & Patrick Macnamara, 2021. "Misallocation and Financial Frictions: the Role of Long-Term Financing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 44-63, April.
    • Handle: RePEc:red:issued:19-18
    DOI: 10.1016/j.red.2020.09.002
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    Cited by:

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    2. Gu, Shijun & Jia, Chengcheng, 2022. "Firm dynamics and SOE transformation during China’s Economic Reform," Journal of International Money and Finance, Elsevier, vol. 127(C).
    3. Li, Huiyu, 2022. "Leverage and productivity," Journal of Development Economics, Elsevier, vol. 154(C).
    4. Saifullah Khan & Adnan Shoaib, 2024. "Firm value adjustment speed through financial friction in the presence of earnings management and productivity growth: evidence from emerging economies," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.
    5. Kim, Hwagyun & Mathur, Vipul & Shin, Jong Kook & Subramanian, Chetan, 2023. "Misallocation of debt and aggregate productivity," Journal of Corporate Finance, Elsevier, vol. 83(C).
    6. Yunwei Li & Wenjing Long & Xiao Ning & Yumeng Zhu & Yifan Guo & Zhou Huang & Yu Hao, 2022. "How can China's sustainable development be damaged in consequence of financial misallocation? Analysis from the perspective of regional innovation capability," Business Strategy and the Environment, Wiley Blackwell, vol. 31(7), pages 3649-3668, November.

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    More about this item

    Keywords

    Misallocation; Financial frictions; Long-duration bonds;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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