Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment.Review of Financial Studies

We analyze how increased access to financing affects firm total factor productivity (TFP) by exploiting a natural experiment following interstate banking deregulations that increased access to bank financing. We find that firms ’ TFP increases after their states implement these deregulations. Using a regression discontinuity approach based on the Small Business Administration’s funding eligibility criteria, we show that TFP increases following the deregulations are significantly greater for financially constrained firms. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. (JEL G32, G21) Access to adequate financing is an important issue for firms, particularly for younger and smaller entrepreneurial firms. Given the important role that small businesses and entrepreneurial firms play in the process of creative destruction, it is not surprising that alleviating financial constraints for entrepreneurial startups and small businesses is an important policy concern across the world. The financial crisis of 2008 clearly demonstrated how critical access to bank financing is, at both the firm and economy-wide levels. While prior studies We thank the editor, David Denis, and an anonymous referee for excellent comments and suggestions on this article. We would like to thank seminar participants at the 2014 Western Finance Association meetings