External financing and the role of financial frictions over the business cycle: Measurement and theory |
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Affiliation: | 1. Department of Economics, Mihaylo College of Business and Economics, California State University Fullerton, Fullerton, CA 92834, United States;2. Department of Economics, University of Western Ontario, London, ON N6A 5C2, Canada |
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Abstract: | Empirically, there is substantial cross-sectional variation in firms’ use of external funds: roughly 80% of investment by privately held firms is financed externally, compared to 20% for publicly traded firms. In a model consistent with privately held and publicly traded firms’ use of external funds, financial shocks generate only a modest response of output. This exercise casts doubt on the ability of financial shocks to generate significant economic fluctuations and emphasizes the role of non-financial linkages in understanding the importance of financial shocks. |
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