Financial Constraints and Firm Size: Micro-Evidence and Aggregate Implications

Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firmsize distribution, even in the top 1%. Incorporating a richer, empirically supported, productivity process into a standard heterogeneous firms model generates a joint distribution of size and credit constraints in line with the data. The presence of large constrained firms in the economy, together with their elevated capital share, explains about 66% of the response of output to a financial shock. We conclude by providing microevidence in support of themodel mechanism.

Keywords: Firmsize; business cycle; financial accelerator
JEL codes E62; E22; E23

Working paper no. 777