The 'cleansing effect' of recessions: Inefficient firms fail, average productivity goes up

During the Great Recession, the percentage of US establishments going bankrupt increased from 11.8 per cent to 13.5 per cent. Similar increases in business failures have been observed in other countries hit by the recession. The conventional view is that the increase in the exit rate (when firms fail and thus exit the market) raises average productivity, because the recession allows resources to be reallocated from failing firms to surviving ones that are more productive. But does this ‘cleansing effect’ of recessions hold when companies face financial constraints?