Finance and Productivity Growth: Firm-Level Evidence
42 Pages Posted: 17 Mar 2012 Last revised: 4 Feb 2016
Date Written: February 4, 2016
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: Suggested Citation