This paper integrates a model of rich firm-level dynamics, including factor adjustment frictions and wage setting, with a theory of costly debt and equity financing. The theory can confront a variety of empirical moments relating to the cross sections of debt, employment growth, and capital investment. The model is estimated by method of simulated moments. The estimation makes use of a new quarterly panel dataset that links a firm’s investment and financing decisions to its employment and wages. Using the estimated parameters, we assess the model’s ability to replicate recent reduced-form evidence on the effects of financing frictions on capital and labor demand.
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