Financial markets and misallocation: the long and short of leverage and productivity dispersion

I use a new publicly available industry-year panel dataset capturing within-industry productivity dispersion to examine the relationship between various measures of industry-level leverage, a common measure of financial constraints, and industry-level productivity dispersion, a common measure of misallocation. Increases in short-term leverage are associated with increases in TFPR dispersion. Likewise, increased short-term leverage is associated with a persistent increase in labor productivity dispersion. Higher long-term leverage is generally associated with higher dispersion in TFPR. However, there is little correlation between long-term leverage and labor productivity dispersion. On the asset side of the balance sheet, the accumulation of inventories is associated with lower dispersion. I interpret these results in a model featuring sources of finance with different time horizons and nonuniform financial constraints across inputs.