Corporate Indebtedness and Low Productivity Growth of Italian Firms

Productivity growth in Italy has been persistently anemic and lagged that of the euro area over the period 1999–2015, while the indebtedness of its corporate sector increased. Using the ORBIS firm-level database, this chapter studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms, and investigates whether total factor productivity (TFP) growth varies with the level of corporate indebtedness. The authors employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, & Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (e.g., oil price shocks, labor and product market frictions, and the stance of the global financial cycle). Filtering out the effects of unobserved common factors and controlling for firm-specific characteristics, the authors find significant negative effects of persistent corporate-debt build-up on firms’ TFP growth on average, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. The results have strong policy implications, for example the design of the tax system should discourage persistent corporate-debt accumulation, and effective and timely frameworks to reduce corporate-debt overhangs are essential.