Financing Constraints and Corporate Growth

Abstract

This paper analyses the dynamic investment and growth prospects of a financially constrained firm. Three types of financing constraints are examined: internal finance, debt ceiling and exponential interest costs. To study the growth dynamics of firms subject to the above constraints, numerical solutions, for assigned parameter values, are provided using the reverse shooting Runge-Kutta algorithm. The simulation results suggest that the firm"s real and financial variables are highly correlated for constrained firms, as the optimal policy of these businesses is to over-invest in capital in the initial years, and then deplete this excess capacity in future periods. This, however, results in slower rates of growth for the constrained firm, and for entities facing a debt ceiling, greater rates of fluctuation in their rates of expansionFinancing Constraints, Corporate Growth