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Does Access to External Finance Improve Productivity? Evidence from a Natural Experiment

53 Pages Posted: 17 Jan 2008 Last revised: 23 Sep 2014

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Jess Cornaggia

Pennsylvania State University - Department of Finance

Date Written: March 4, 2009

Abstract

We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison to a control group. This result is statistically significant, and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.

Keywords: economic growth, access to finance, banking, natural experiment, productivity, crop yields, ethanol

JEL Classification: G21, D24, Q12, Q14

Suggested Citation

Butler, Alexander W. and Cornaggia, Jess, Does Access to External Finance Improve Productivity? Evidence from a Natural Experiment (March 4, 2009). Journal of Financial Economics (JFE), Vol. 99, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1084154 or http://dx.doi.org/10.2139/ssrn.1084154

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

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