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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.

Suggested Citation

  • Jeffrey I. Bernstein & M. Ishaq Nadiri, 1993. "Production, Financial Structure and Productivity Growth in U.S. Manufacturing," NBER Working Papers 4309, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4309
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    Cited by:

    1. Francisco Gallego Y. & Norman Loayza., 2000. "Financial Structure in Chile: Macroeconomic Developments and Microeconomic Effects," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 3(2), pages 5-30, August.
    2. Chaoshin Chiao, 2002. "Relationship between debt, R&D and physical investment, evidence from US firm-level data," Applied Financial Economics, Taylor & Francis Journals, vol. 12(2), pages 105-121.
    3. M. Ishaq Nadiri & Ingmar Prucha, 2001. "Dynamic Factor Demand Models and Productivity Analysis," NBER Chapters,in: New Developments in Productivity Analysis, pages 103-172 National Bureau of Economic Research, Inc.
    4. Patrick Artus, 1995. "Mode de financement de l'investissement et croissance," Revue Économique, Programme National Persée, vol. 46(2), pages 169-194.
    5. 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.
    6. Mun, S-B. & Nadiri, M.I., 2002. "Information Technology Externalities: Empirical Evidence from 42 U.S. Industries," Working Papers 02-03, C.V. Starr Center for Applied Economics, New York University.
    7. 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 20756, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Gatti, Roberta & Love, Inessa, 2006. "Does access to credit improve productivity ? Evidence from Bulgarian firms," Policy Research Working Paper Series 3921, The World Bank.
    9. Roberta Gatti & Inessa Love, 2008. "Does access to credit improve productivity?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 445-465, July.
    10. 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, vol. 35(01), March.
    11. International Monetary Fund, 2007. "Italy; Selected Issues," IMF Staff Country Reports 07/65, International Monetary Fund.
    12. Ferdaus Hossain & Ruchi Jain & Ramu Govindasamy, 2005. "Financial structure, production, and productivity: evidence from the U.S. food manufacturing industry," Agricultural Economics, International Association of Agricultural Economists, vol. 33(s3), pages 399-410, November.
    13. 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, vol. 13(1), pages 1-32, June.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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