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Finance and Productivity Growth: Firm-level Evidence

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  • Levine, Oliver

    () (University of Wisconsin)

  • Warusawitharana, Missaka

    () (Board of Governors of the Federal Reserve System (U.S.))

Abstract

Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic activity remains persistently depressed following financial crisis.

Suggested Citation

  • Levine, Oliver & Warusawitharana, Missaka, 2014. "Finance and Productivity Growth: Firm-level Evidence," Finance and Economics Discussion Series 2014-17, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-17
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    Cited by:

    1. Anna M. Ferragina & Fernanda Mazzotta & Khalid Sekkat, 2016. "Financial constraints and productivity growth across the size spectrum: microeconomic evidence from Morocco," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 361-381, December.
    2. Morais, Bernardo, 2015. "Risk, Financial Development and Firm Dynamics," International Finance Discussion Papers 1134, Board of Governors of the Federal Reserve System (U.S.).
    3. Shutao Cao & Danny Leung, 2016. "Financial Constraint and Productivity: Evidence from Canadian SMEs," Staff Working Papers 16-44, Bank of Canada.
    4. Asian Development Bank Institute, 2015. "Asian Development Outlook 2015 Financing Asia’s Future Growth," Working Papers id:6666, eSocialSciences.
    5. Ajai Chopra, 2015. "Financing Productivity- and Innovation-Led Growth in Developing Asia: International Lessons and Policy Issues," Working Paper Series WP15-6, Peterson Institute for International Economics.
    6. Franklin, Jeremy & Rostom, May & Thwaites, Gregory, 2015. "The banks that said no: banking relationships, credit supply and productivity in the United Kingdom," Bank of England working papers 557, Bank of England.
    7. Barnett, Alina & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The productivity puzzle: a firm-level investigation into employment behaviour and resource allocation over the crisis," Bank of England working papers 495, Bank of England.
    8. Jeremy Franklin & May Rostom & Gregory Thwaites, 2015. "The banks that said no: banking relationships, credit supply and productivity in the UK," Discussion Papers 1525, Centre for Macroeconomics (CFM).
    9. Ferrando, Annalisa & Ruggieri, Alessandro, 2015. "Financial constraints and productivity: evidence from euro area companies," Working Paper Series 1823, European Central Bank.

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    Keywords

    Finance-growth nexus; financial crisis; total factor productivity (TFP);

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