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

Marcello Estevão and Tiago Severo

No 2011/199, IMF Working Papers from International Monetary Fund

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: WP; external finance; cost of funds; Business cycles; total factor productivity; financial shocks; returns to scale; sectoral TFP; market portfolio; cost of capital; productivity shock; production function; estimation result; Productivity; Bond yields; Corporate bonds; Global (search for similar items in EconPapers)
Pages: 40
Date: 2011-08-01
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Shocks, financial dependence and efficiency: Evidence from U.S. and Canadian industries (2014)
Journal Article: Shocks, financial dependence and efficiency: Evidence from U.S. and Canadian industries (2014)
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