We develop a new empirical framework to provide microeconomic evidence on the mechanisms underlying macroeconomic models with financial frictions and assess the self-financing channel. Using administrative panel data, we estimate firm-level productivity and its effect on firms’ decisions. Our framework is robust to financial frictions, whereas standard methods used to estimate productivity dynamics are biased. The productivity process is largely non-linear, with larger persistence for more productive firms, while persistence can change significantly in the face of extreme events. We uncover a distribution of investment and wealth accumulation propensities in response to productivity shocks. These propensities are heterogeneous in the stock of wealth and productivity level: (i) investment propensities are larger for high-productivity firms and high-wealth firms, and (ii) wealth accumulation propensities are larger for high-productivity firms with low levels of wealth. We provide evidence of collateral-based and earning-based constraints. Our estimates support the existence of self-financing but show that its impact is limited.
STEG Working Paper • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy