High-quality financial statements, credit constraints, and labor productivity

Using a large firm-level dataset from the World Bank Enterprise Surveys covering the period 2006-2024, which includes 146 countries and over 158,900 observations, this paper employs an instrumental variable strategy to show that firms with high-quality financial statements (HQFS)—defined as financial statements checked and certified by an external auditor—exhibit significantly higher labor productivity, approximately 46% higher. This result is robust across various tests. A decline in credit constraints is highlighted as the key channel through which HQFS increases labor productivity. Heterogeneity analysis reveals that the effect of HQFS diminishes with increasing firm size and age, as well as with higher levels of structural factors, including real GDP per capita, domestic credit to the private sector, and control of corruption. This indicates that the effect of HQFS on labor productivity is primarily observed among small, young firms in developing countries.