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The two faces of subsidized loans

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  • Kayo, Eduardo K.
  • Silva, Walter Eclache da
  • Martelanc, Roy

Abstract

Agency theory states that debt plays an essential disciplinary role in preventing management from overinvesting. In this study, we show contrasting results regarding subsidized loans from the Brazilian National Bank for Economic and Social Development (BNDES), which increases the probability of firms overinvesting in capital expenditures. BNDES loans create value for shareholders up to a certain point, whereafter the value declines. These results are robust to including several controls, firm-fixed effects, and instrumental variables related to the endogeneity of choosing BNDES loans. This study contributes to agency theory and development banks’ role while shedding light on important socioeconomic issues.

Suggested Citation

  • Kayo, Eduardo K. & Silva, Walter Eclache da & Martelanc, Roy, 2023. "The two faces of subsidized loans," Finance Research Letters, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323005214
    DOI: 10.1016/j.frl.2023.104149
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    More about this item

    Keywords

    BNDES; Subsidized loans; Capital structure; Agency theory; Overinvestment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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