Shocks, Financial Dependence and Efficiency: Evidence from U.S. and Canadian Industries

41 Pages Posted: 18 Aug 2011

See all articles by Marcello M. Estevão

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Tiago Severo

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2011

Abstract

The paper investigates how changes in industries’ funding costs affect total factor productivity (TFP) growth. Based on panel regressions using 31 U.S. and Canadian industries between 1991 and 2007, and using industries’ dependence on external funding as an identification mechanism, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This effect is, however, non-monotonic across sectors with different degrees of dependence on external finance. Our findings cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. The paper presents a theoretical model that produces the observed non-monotonic effect of financial shocks on TFP growth and suggests that financial shocks distort the allocation of factors across firms even within an industry, thus reducing TFP growth.

Keywords: Business cycles, total factor productivity, financial shocks

JEL Classification: E23, E32, E44

Suggested Citation

Estevao, Marcello M. and Severo, Tiago, Shocks, Financial Dependence and Efficiency: Evidence from U.S. and Canadian Industries (August 17, 2011). Available at SSRN: https://ssrn.com/abstract=1911492 or http://dx.doi.org/10.2139/ssrn.1911492

Marcello M. Estevao

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th St., NW
HQ1-10-115
Washington, DC 20431
United States
202-623-6038 (Phone)
202-589-6038 (Fax)

Tiago Severo (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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