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

Author/Editor: Marcello M. Estevão ; Tiago Severo
Publication Date: August 01, 2011
Electronic Access: Free Full text (PDF file size is 830KB).
Use the free Adobe Acrobat Reader to view this PDF file

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.
Series: Working Paper No. 11/199
Subject(s): External shocks | Industrial sector

Author's Keyword(s): Business cycles | total factor productivity | financial shocks
Publication Date: August 01, 2011
ISBN/ISSN: 9781462304226/1018-5941 Format: Paper
Stock No: WPIEA2011199 Pages: 40
US$18.00 (Academic Rate:
US$18.00 )
Please address any questions about this title to