Does Access to Finance Improve Productivity? Evidence from a Natural Experiment

We study the relation between access to finance and productivity at the county level. We exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a differences-in-differences-indifferences testing approach and find that production increases the most over the sample period in counties with relatively strong access to finance, even in comparison to a control group. This result is statistically significant, and robust to a variety of controls, alternative variables, and tests. Our findings show how access to finance can have a positive impact on productivity, and speak to the larger role of finance in economic growth. * Both authors are at the University of Texas at Dallas School of Management. We are grateful for helpful comments from Bo Becker, Mitchell Berlin, Lee Ann Butler, Gerry Gay, Valery Polkovnichenko, Phil Strahan, James Weston, Harold Zhang, and seminar participants at University of Texas at Dallas. Special thanks go to Caitlin Boyle of King Corn for help in acquiring information about corn production. Any errors are our own. Send correspondence to the first author at: Department of Finance, School of Management, SM 31, The University of Texas at Dallas, 800 W Campbell Rd., Richardson, TX 75080-3021. E-mail: [email protected]. Does Access to Finance Improve Productivity? Evidence from a Natural Experiment