Working Paper

Finance and Productivity Growth: Firm-level Evidence


Abstract: Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic activity remains persistently depressed following financial crisis.

Keywords: Finance-growth nexus; financial crisis; total factor productivity (TFP);

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2014-02-24

Number: 2014-17

Pages: 53 pages