Working Paper Series Financial constraints and

Note: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB We study the relation between firms financial structure, access to external finance and labor productivity using a unique dataset of firm-level data for several euro area countries during the period 1995-2011. The empirical strategy is twofold. First we build a synthetic indicator of financial constraints using an a-priori classification based on specific firm char-acteristics and various measures of financial pressure. Therefore we augment a firm-level production equation with our indicator to estimate the direct impact of access to finance to firm-level productivity. We find negative and significant effects in the majority of coun-tries and industries, with marginal impacts considerably higher in industries that innovate the most, like “Energy, Gas and Water Supply ” and “R&D, Communication and Infor-mation”. Counter-factual exercises show that, as opposed to Germany and Netherlands, countries like Italy and Portugal are the most affected by financial constraints, with an estimated loss of around 21 % of their labor productivity. In addition, each country would gain on average between one and two percent of their labor productivity by expanding the access to finance of small firms to that of the average large firm