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

August 1, 2011

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Marcello M. Estevão, and Tiago Severo. Shocks, Financial Dependence, and Efficiency: Evidence From U.S. and Canadian Industries, (USA: International Monetary Fund, 2011) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bond yields, Corporate bonds, Financial institutions, Labor, Production, Productivity, Total factor productivity

Keywords: Bond yields, Business cycles, Corporate bonds, Cost of capital, Cost of funds, Estimation result, External finance, Financial shocks, Global, Market portfolio, Production function, Productivity, Productivity shock, Returns to scale, Sectoral TFP, Total factor productivity, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/199
Stock No:

WPIEA2011199
ISBN:

9781462304226
ISSN:

1018-5941

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