Corporate financial structure,misallocation and total factor productivity |
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Institution: | 1. University of California, Berkeley, Haas School of Business, 545 Student Services #1900, Berkeley, CA 94720-1900, USA;2. Northwestern University, Kellogg School of Management, 2100 Sheridan Road, Evanston, IL 60208, USA;1. Humboldt University Berlin, CEPR and IZA, Germany;2. Copenhagen Business School, Denmark |
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Abstract: | This paper studies the quantitative relevance of the cross-sectional dispersion of corporate financial structure in explaining the intra-industry allocation efficiency of productive factors. I solve a heterogeneous firms model with financial constraints and distortions to the marginal rental-rate of capital, and develop a measure for the intra-industry misallocation of factors of production. The distribution of capital rental rate and two types of firm-level balance sheet characteristics (pledgeability and liquid asset positions) determine the extent of misallocation and industry level total factor productivity (TFP). I calibrate the model using firm-level balance sheet data from seven major industry clusters of the US economy. The counterfactual policy experiments show that weakening the observed balance sheet positions for financially constrained firms leads to a reallocation of production factors from firms with high cost distortions to firms with low cost distortions and cause quantitatively important industry level TFP losses. |
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Keywords: | Financial structure Distortions Misallocation Total factor productivity |
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