Every Cloud Has a Silver Lining: Cleansing Effects of the Portuguese Financial Crisis *

Using firm‐level data, this paper shows that the Portuguese financial crisis was a period of intensified productivity‐enhancing reallocation. Aggregate productivity gains, both in manufacturing and services, came from relatively higher contributions of entering and exiting firms and from reallocation of resources between surviving firms. At the micro level, the crisis reduced the probability of survival for high‐ and low‐productivity firms, but it hit low‐productivity firms disproportionately harder. We also found important heterogeneous effects across economic sectors regarding input reallocation that underline the importance of using data for the entire economy whenever similar studies are conducted.