Credit Supply and Firm Productivity Growth

We study the impact of bank credit supply on the output and productivity of borrower firms. Exploiting a matched firm-bank database covering all credit relationships of Italian corporations over more than a decade, we measure idiosyncratic supply-side shocks to firm credit availability. Then, we estimate a production model augmented with heterogeneous financial frictions, to show that an expansion in the credit supply faced by a firm increases both its input use and its ability to generate value added or revenues for a given level of inputs. Our estimates imply that the credit crunch between 2007-2009 can account for about a fifth of the observed decline in Italian total factor productivity growth over the same period. Results are robust to an alternative measure of credit supply shock that uses the 2007-2008 interbank market freeze as a natural experiment to control for assortative matching between borrowers and lenders. A credit contraction generates a larger effect than a credit expansion of the same magnitude, implying that high volatility of credit is harmful for average firm productivity. Finally, we investigate the possible mechanisms: we show that the effect of credit supply shocks on productivity is persistent over time and that access to credit fosters several productivity-enhancing activities, such as IT-adoption, export, innovation, and adoption of superior management practices. JEL Classification: D22, D24, G21