Periodic Reporting for period 3 - grow (Information Frictions, Financing and Growth: The Impact of Firm Certification)
Reporting period: 2022-12-01 to 2024-05-31
Mutual guarantee programs, where governments offer a guarantee on bank loans, are common economic stimulus measures (eg. Columba et al., 2010, Lelarge et al., 2010, Bach, 2014, Gonzalez-Uribe and Wang, 2020). Through these programs, governments offer (partial) guarantees on loans granted by financial institutions to small firms for the purpose of subsidizing the cost of borrowing and alleviating financing frictions, which are known to be larger for firms that are small and more informationally opaque. These programs are often used to respond to financial crises, when the supply of credit is limited. Despite their popularity among governments and policy-makers, the real effects of these programs remain understudied, including potential heterogeneous effects over the business cycle. Estimating their causal effects is challenging due to the endogenous selection of firms into these programs. Data availability also hinders the analysis of their effects, as medium and small firms are mostly private. Despite these challenges, understanding how investment and employment respond to changes in the cost of subsidized credit is of first-order importance given the resources devoted by governments around the world.
I investigate potential channels through which the links between informational frictions, access to financing and corporate growth can operate. I exploit a credit certification program targeting SMEs in Portugal. Through this government program firms have access to loans with a government guarantee, as well as a credit rating. By studying this program, I can estimate how sensitive investment, employment and firm growth are to the cost of debt financing. I can also investigate the role of credit certification for SMEs in promoting this growth. In a second step, I study the externalities generated by firm certification on their networks, which includes other firms in their supply chain, but also financial institutions. In this work I also provide detailed evidence of the mechanisms through which growth occur and is impeded due to specific frictions, such as information.
Small and medium-sized enterprises (SMEs) are firms for which informational frictions are expected to be particularly high and access to financing constrained. At the same time, these firms represent an extremely large part of the European economy: according to the “Annual Report on European SMEs” by the European Union (EU) in 2016 they represented almost all (98%) of non-financial enterprises, two-thirds (66%) of total EU employment and accounted for almost three-fifths (57%) of the value added generated by the non-financial sector. Despite their importance to the economy, only recently these firms have gained particular attention by researchers and policymakers that began to recognize the urgency of the SME credit access problem. Most SMEs do not have access to the capital markets, so typically their most important source of external finance are bank loans. Government and national financial structures affect credit availability mainly through lending technologies, so several measures are developed to improve the SMEs access to finance through bank loans at different levels.
I investigate potential channels through which the links between informational frictions, access to financing and corporate growth can operate. I exploit a credit certification program targeting SMEs in Portugal. Through this government program firms have access to loans with a government guarantee, as well as a credit rating. By studying this program, I can estimate how sensitive investment, employment and firm growth are to the cost of debt financing. I can also investigate the role of credit certification for SMEs in promoting this growth. In a second step, I study the externalities generated by firm certification on their networks, which includes other firms in their supply chain, but also financial institutions. In this work I also provide detailed evidence of the mechanisms through which growth occur and is impeded due to specific frictions, such as information.
Small and medium-sized enterprises (SMEs) are firms for which informational frictions are expected to be particularly high and access to financing constrained. At the same time, these firms represent an extremely large part of the European economy: according to the “Annual Report on European SMEs” by the European Union (EU) in 2016 they represented almost all (98%) of non-financial enterprises, two-thirds (66%) of total EU employment and accounted for almost three-fifths (57%) of the value added generated by the non-financial sector. Despite their importance to the economy, only recently these firms have gained particular attention by researchers and policymakers that began to recognize the urgency of the SME credit access problem. Most SMEs do not have access to the capital markets, so typically their most important source of external finance are bank loans. Government and national financial structures affect credit availability mainly through lending technologies, so several measures are developed to improve the SMEs access to finance through bank loans at different levels.
The project involves different stages, related to sequential tasks of data cleaning, merging and analysis. The following tasks have been implemented:
1) Organising all the data, which comes from different sources. I collected and organized the data on the program SME-Leader that identifies the firms that were certified year by year. I also collected data on the program criteria that change on a yearly basis.
2) I have reconciled and merged the SME-Leader list with the data on accounting information on all Portuguese firms from the IES dataset, with firm-employee level data from Quadros de Pessoal, with trade flows data from The Foreign Trade Statistics – INE, and with Input Data (IAPI) also from INE.
3) The SME-Leader rules and criteria have changed annually from 2008 to 2016. This information was collected, organized, and double-checked in the data merged in points 1) and 2).
4) I have conducted two surveys to SMEs in Portugal. First, a survey that aims to understand the perception of firms regarding the SME-Leader Program, including their selection to take up the program SME-Leader, as well as its perceived benefits. Second, a survey during the COVID19 pandemic to understand the role of information frictions for take up of government support programs.
5) I have conducted an experiment during COVID to test for the presence of information frictions in the access to government support programs such as the one being studied.
6) Evaluation of the SME-Leader Program - Impact for Firms and Real Effects: I have analysed the data to estimate financial and real effects of the SME-Leader certification in terms of access to financing, investment, growth, and performance measures. I have produced a working paper documenting the main real effects during economic recessions and expansions: “Supporting Small Firms Through Recessions and Recoveries", with Diana Bonfim and Clara Raposo.
7) I have studied the role of information frictions on government support programs take up during covid and produced the working paper "Firm Take-up of COVID19 Government Measures – Evidence from Portugal" with Diogo Mendes and Christopher Hansman.
8) Two additional papers are now discussion papers. The first decomposes the labour effects of government guarantees and studies the reallocation of workers across firms and in and out of unemployment as a result of these government support programs. The second discussion paper studies the impact of government guarantees and the role of financial frictions for product quality upgrade in international trade. More specifically we study whether access to credit is a key barrier in the production and export of high quality goods.
Main conclusions:
1. Firms that are eligible to the government program increase borrowing and borrow at lower rates than non-eligible firms, allowing them to increase investment and employment during crises but not during expansion periods. These also exhibit increased return on assets and less defaults during crisis. Industry-level analysis shows reduced productivity heterogeneity in more exposed industries, which is consistent with improved credit allocation because of the program.
2. There is a positive and significant treatment effect of providing SMEs with information regarding government support programs. This constitute direct evidence that information frictions act as a barrier to comprehensive distribution of firm-level support measures.
Results have been presented at numerous research conferences, including the NBER meetings, ASSA meetings, EFA meetings, and Cavalcade. Results have also been presented at central banks including the Portuguese central bank, the Fed Board, the Norges Bank, Bank of Italy, the Bank of Greece and other policy institutions, and are published as part of the CEPR working paper series. There was also significant media coverage of the results, mostly by Portuguese media.
1) Organising all the data, which comes from different sources. I collected and organized the data on the program SME-Leader that identifies the firms that were certified year by year. I also collected data on the program criteria that change on a yearly basis.
2) I have reconciled and merged the SME-Leader list with the data on accounting information on all Portuguese firms from the IES dataset, with firm-employee level data from Quadros de Pessoal, with trade flows data from The Foreign Trade Statistics – INE, and with Input Data (IAPI) also from INE.
3) The SME-Leader rules and criteria have changed annually from 2008 to 2016. This information was collected, organized, and double-checked in the data merged in points 1) and 2).
4) I have conducted two surveys to SMEs in Portugal. First, a survey that aims to understand the perception of firms regarding the SME-Leader Program, including their selection to take up the program SME-Leader, as well as its perceived benefits. Second, a survey during the COVID19 pandemic to understand the role of information frictions for take up of government support programs.
5) I have conducted an experiment during COVID to test for the presence of information frictions in the access to government support programs such as the one being studied.
6) Evaluation of the SME-Leader Program - Impact for Firms and Real Effects: I have analysed the data to estimate financial and real effects of the SME-Leader certification in terms of access to financing, investment, growth, and performance measures. I have produced a working paper documenting the main real effects during economic recessions and expansions: “Supporting Small Firms Through Recessions and Recoveries", with Diana Bonfim and Clara Raposo.
7) I have studied the role of information frictions on government support programs take up during covid and produced the working paper "Firm Take-up of COVID19 Government Measures – Evidence from Portugal" with Diogo Mendes and Christopher Hansman.
8) Two additional papers are now discussion papers. The first decomposes the labour effects of government guarantees and studies the reallocation of workers across firms and in and out of unemployment as a result of these government support programs. The second discussion paper studies the impact of government guarantees and the role of financial frictions for product quality upgrade in international trade. More specifically we study whether access to credit is a key barrier in the production and export of high quality goods.
Main conclusions:
1. Firms that are eligible to the government program increase borrowing and borrow at lower rates than non-eligible firms, allowing them to increase investment and employment during crises but not during expansion periods. These also exhibit increased return on assets and less defaults during crisis. Industry-level analysis shows reduced productivity heterogeneity in more exposed industries, which is consistent with improved credit allocation because of the program.
2. There is a positive and significant treatment effect of providing SMEs with information regarding government support programs. This constitute direct evidence that information frictions act as a barrier to comprehensive distribution of firm-level support measures.
Results have been presented at numerous research conferences, including the NBER meetings, ASSA meetings, EFA meetings, and Cavalcade. Results have also been presented at central banks including the Portuguese central bank, the Fed Board, the Norges Bank, Bank of Italy, the Bank of Greece and other policy institutions, and are published as part of the CEPR working paper series. There was also significant media coverage of the results, mostly by Portuguese media.
Establishing causal evidence for the presence of financial and informational frictions and estimating those impacts constitutes significant achievements and a breakthrough in the research field of corporate finance.
Finding heterogeneous effects of these government support programs to SMEs over the business cycle was surprising.
Finding heterogeneous effects of these government support programs to SMEs over the business cycle was surprising.