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Neil Kay, Gavin Murphy, Conor O Toole, Iulia Siedschlag, Brian O Connell
Firm-level productivity is highly dependent on the presence of efficient financial markets. Easy access to finance expedites firms’ investments and facilitates physical and human capital accumulation as well as the development and adoption of new technologies (Redmond and Van Zandweghe 2016). By contrast, imperfectly functioning financial markets may lead to capital misallocation, with the consequence that firms unable to access credit forego productivity-boosting investment opportunities (Campello et al. 2010).
The fundamental consequence of credit rationing is that, for lack of alternatives, rationed firms often have to rely on internally generated resources to undertake new investments, meaning that their investment decisions become highly dependent on cash flow availability (Ayyagari et al. 2011). Credit constraints can therefore smother firms’ productivity, with the effects particularly relevant for s