How Does Firm-level Risk Affect Productivity?

This study quantifies and decomposes the impact of increasing firm risk on different production factors. We find that a one standard deviation increase in firm-level risk reduces the total output growth rate of a firm by 1.19 percentage points, of which approximately 77% is from the reduction in total factor productivity growth, 21% is from slower labor growth and only 2% is from slower capital growth. We provide the first evidence of the relationship between firm risk and firm-level total factor productivity, and the transmission mechanisms are reduced human capital investment and a tightened financial constraint.