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Production, Financial Structure and Productivity Growth in U.S. Manufacturing

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  • Jeffrey I. Bernstein
  • M. Ishaq Nadiri

Abstract

The purpose of this paper is to estimate a model that incorporates the effects of financial decisions on production, profitability, and productivity growth. Asymmetric information generates agency costs of debt and signaling benefits of dividends which then influence production decisions. The model is applied to the U.S. manufacturing sector. Agency costs and signaling benefits are measured by their effects on profitability. A one percent increase in debt reduces variable profit by 0.04 percent, while a one percent increase in dividends raises variable profit by 0.12 percent. Agency costs also limit the adjustment of U.S. manufacturing to long-run equilibrium. On average, for $1.00 of funds raised through bond issues, debt adjustment cost is about $0.05. The dynamic efficiency of the manufacturing sector is affected by financial considerations. Signaling benefits contribute 4.2 percent to total factor productivity growth, while agency costs reduce efficiency by 3.3 percent. Thus the financial effects on dynamic efficiency approximately offset each other.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4309.

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Date of creation: Mar 1993
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Handle: RePEc:nbr:nberwo:4309

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Cited by:
  1. Francisco A. Gallego & Norman Loayza, 2000. "Financial Structure in Chile: Macroeconomic Developments and Microeconomic Effects," Econometric Society World Congress 2000 Contributed Papers 1115, Econometric Society.
  2. Hailu, Getu & Jeffrey, Scott R. & Goddard, Ellen W. & Ng, Desmond W., 2004. "Incentive Incompatibility In Co-Operative Agribusiness Firms In Canada: Does Supply Management Matter?," Journal of Food Distribution Research, Food Distribution Research Society, Food Distribution Research Society, vol. 35(01), March.
  3. Sung-Bae Mun & M. Ishaq Nadiri, 2002. "Information Technology Externalities: Empirical Evidence from 42 U.S. Industries," NBER Working Papers 9272, National Bureau of Economic Research, Inc.
  4. Hossain, Ferdaus & Jain, Ruchi, 2001. "Financial Structure, Production and Productivity Growth in U.S. Food Manufacturing Industry," 2001 Annual meeting, August 5-8, Chicago, IL, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 20756, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Gatti, Roberta & Love, Inessa, 2006. "Does access to credit improve productivity ? Evidence from Bulgarian firms," Policy Research Working Paper Series 3921, The World Bank.
  6. Aktham Maghyereh, 2005. "Dynamic Capital Structure: Evidence From The Small Developing Country Of Jordan," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, IIUM Journal of Economis and Management, vol. 13(1), pages 1-32, June.

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