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Finance and Productivity Growth: Firm-Level Evidence

42 Pages Posted: 17 Mar 2012 Last revised: 4 Feb 2016

Oliver Levine

University of Wisconsin - Madison

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2016

Abstract

We examine the effect of financing frictions on corporate innovation. Using a model we show that a rise in financial frictions leads to increased sensitivity of productivity growth, our measure of innovation, to the use of external finance. We test this prediction using a large dataset of mostly private European firms and find strong evidence that financial frictions inhibit firm-level productivity growth. 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 crisis.

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

JEL Classification: D24, G30, O16

Suggested Citation

Levine, Oliver and Warusawitharana, Missaka, Finance and Productivity Growth: Firm-Level Evidence (February 4, 2016). Available at SSRN: https://ssrn.com/abstract=2023668 or http://dx.doi.org/10.2139/ssrn.2023668

Oliver Levine

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

Missaka Warusawitharana (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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