Finance and Productivity Growth: Firm-Level Evidence

Abstract

The effect of financing frictions on firm productivity growth is not well understood. Using a model we show that a rise in financial frictions leads to increased sensitivity of productivity growth to the use of external finance. We test this prediction using a large dataset of mostly private European firms and find strong evidence supporting the prediction. Our findings demonstrate an important link between financial markets and the real economy, and help to explain why economic activity remains persistently depressed following financial crises.

Keywords: Financial crises, financial frictions, innovation, total factor productivity (TFP)

JEL Classification: D24, G30, O16