Corporate Indebtedness and Low Productivity Growth of Italian Firms

February 23, 2018

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Gareth Anderson, and Mehdi Raissi. Corporate Indebtedness and Low Productivity Growth of Italian Firms, (USA: International Monetary Fund, 2018) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Productivity growth in Italy has been persistently anemic and has lagged that of the euro area over the period 1999-2015, while the indebtedness of its corporate sector has increased. Using the ORBIS firm-level database, this paper studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms and investigates whether total factor productivity growth varies with the level of corporate indebtedness. We employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, and Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (for example, oil price shocks, labor and product market frictions, and stance of global financial cycle). Filtering out the effects of unobserved common factors and controlling for firmspecific characteristics, we find significant negative effects of persistent corporate debt build-up on total factor productivity growth, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. Our results have strong policy implications, for example the design of the tax system should discourage persistent corporate debt accumulation, and effective and timely frameworks to reduce corporate debt overhangs are essential.

Subject: Debt burden, Economic sectors, External debt, Labor productivity, Manufacturing, Production, Productivity, Total factor productivity

Keywords: Capital structure, Corporate debt, Cross-sectional dependence., CS-DL estimate, CS-DL specification, Debt burden, Dependent variable, Dynamic heterogeneous panel threshold models, Firm size, Global, Growth relationship, Identification numbers, Indebted firm, Indebtedness error, Italy, Labor productivity, Long-term debt, Manufacturing, Order selection procedure, Productivity, Productivity growth, Slope heterogeneity, Total factor productivity, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/033
Stock No:

WPIEA2018033
ISBN:

9781484343265
ISSN:

1018-5941

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