This paper contrasts the investment behavior of different financial institutions in debt securities as a response to past returns. For identification, I use unique security-level data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a procyclical manner to past security-specific holding period returns. In contrast, insurance companies and pension funds act countercyclically; they buy when returns have been negative and sell after high returns. The heterogeneous responses can be explained by differences in their balance sheet structure. I exploit within-sector variation in the financial constraint to show that tighter constraints are associated with relatively more procyclical investment behavior.

We study the role of financial frictions for productivity. Using a rich cross-country firm-level data, we exploit variation in preexisting exposure to the 2008 global financial crisis to study the post-crisis productivity slowdown. Firms with weaker precrisis balance sheets experienced a highly persistent decline in post-crisis total factor productivity growth relative to their less vulnerable counterparts, accounting for about one-third of the within-firm productivity slowdown. This decline was larger for firms that faced a more severe tightening of credit conditions. Financially fragile firms cut back on innovation activities, one channel through which financial frictions weakened post-crisis productivity growth.