Trade and firm financing

Financial frictions can pose a barrier to export entry by altering a firm's long-term capital structure. The focus on long-term firm financing is motivated by our empirical finding that exporting firms tend to be more leveraged than non-exporting firms in terms of long-term debt, as distinct from short-term working capital. We explain this fact by marrying a corporate finance model of capital structure, featuring an endogenous choice between equity and long-term debt, with a trade model featuring heterogeneous firms and export entry. The model predicts that exporting firms will prioritize reducing the cost of long-term capital over relaxing a short-term working capital constraint to scale up production.