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Finance and Productivity Growth: Firm-level Evidence

  • Levine, Oliver

    ()

    (University of Wisconsin)

  • Warusawitharana, Missaka

    ()

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

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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-17.

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Length: 53 pages
Date of creation: 24 Feb 2014
Date of revision:
Handle: RePEc:fip:fedgfe:2014-17
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