IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_5458.html
   My bibliography  Save this paper

What if Firms Could Borrow More? Evidence from a Natural Experiment

Author

Listed:
  • James R. Brown
  • Gustav Martinsson
  • Christian Thomann

Abstract

We study the effects of a unique lending program initiated by the Swedish government at the height of the financial crisis that allowed firms to suspend payment of all labor-related taxes and fees. Comprehensive administrative data on all Swedish firms show that firms borrowing from the program have higher rates of debt growth, investment spending, and employment growth compared to otherwise similar firms whose labor taxes were sufficiently low they could not benefit from the program. These results connect the availability of external credit with real activity in entrepreneurial firms in a way that has proved difficult in other settings.

Suggested Citation

  • James R. Brown & Gustav Martinsson & Christian Thomann, 2015. "What if Firms Could Borrow More? Evidence from a Natural Experiment," CESifo Working Paper Series 5458, CESifo.
    • Handle: RePEc:ces:ceswps:_5458
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5458.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Laurent Bach, 2014. "Are Small Businesses Worthy of Financial Aid? Evidence from a French Targeted Credit Program," Review of Finance, European Finance Association, vol. 18(3), pages 877-919.
    2. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    3. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    4. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Liquidity Management and Corporate Investment During a Financial Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1944-1979.
    5. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    6. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    7. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    8. Iyer, Rajkamal & Da-Rocha-Lopes, Samuel & Peydró, José-Luis & Schoar, Antoinette, 2014. "Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 27(1), pages 347-372.
    9. Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 73-142.
    10. Joan Farre-Mensa & Alexander Ljungqvist, 2016. "Do Measures of Financial Constraints Measure Financial Constraints?," The Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 271-308.
    11. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    12. Himmelberg, Charles P & Petersen, Bruce C, 1994. "R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 38-51, February.
    13. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 572-607.
    14. Marco Pagano & Giovanni Pica, 2012. "Finance and employment [Credit constraints as a barrier to the entry and post-entry growth of firms]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 27(69), pages 5-55.
    15. Iacus, Stefano & King, Gary & Porro, Giuseppe, 2009. "cem: Software for Coarsened Exact Matching," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 30(i09).
    16. Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
    17. Öztekin, Özde & Flannery, Mark J., 2012. "Institutional determinants of capital structure adjustment speeds," Journal of Financial Economics, Elsevier, vol. 103(1), pages 88-112.
    18. Matthew Blackwell & Stefano Iacus & Gary King & Giuseppe Porro, 2009. "cem: Coarsened exact matching in Stata," Stata Journal, StataCorp LP, vol. 9(4), pages 524-546, December.
    19. Kahle, Kathleen M. & Stulz, René M., 2013. "Access to capital, investment, and the financial crisis," Journal of Financial Economics, Elsevier, vol. 110(2), pages 280-299.
    20. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    21. Claire Lelarge & David Sraer & David Thesmar, 2010. "Entrepreneurship and Credit Constraints: Evidence from a French Loan Guarantee Program," NBER Chapters, in: International Differences in Entrepreneurship, pages 243-273, National Bureau of Economic Research, Inc.
    22. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    23. Lerner, Josh, 1999. "The Government as Venture Capitalist: The Long-Run Impact of the SBIR Program," The Journal of Business, University of Chicago Press, vol. 72(3), pages 285-318, July.
    24. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    25. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
    26. William Kerr & Ramana Nanda, 2009. "Financing Constraints and Entrepreneurship," NBER Working Papers 15498, National Bureau of Economic Research, Inc.
    27. Chen, Huafeng (Jason) & Chen, Shaojun (Jenny), 2012. "Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series," Journal of Financial Economics, Elsevier, vol. 103(2), pages 393-410.
    28. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    29. Alicia M. Robb & David T. Robinson, 2014. "The Capital Structure Decisions of New Firms," The Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 153-179, January.
    30. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, February.
    31. C. Edward Fee & Charles J. Hadlock & Joshua R. Pierce, 2009. "Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2361-2392, June.
    32. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 555-587, June.
    33. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hanspal, Tobin, 2016. "The effect of personal financing disruptions on entrepreneurship," SAFE Working Paper Series 161, Leibniz Institute for Financial Research SAFE.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    2. Théo Nicolas, 2022. "Short-term financial constraints and SMEs’ investment decision: evidence from the working capital channel," Small Business Economics, Springer, vol. 58(4), pages 1885-1914, April.
    3. Théo Nicolas, 2019. "How Do Short-term Financial Constraints Affect SMEs’ Long-Term Investment: Evidence from the Working Capital Channel," Working papers 731, Banque de France.
    4. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    5. Liu, Duan & Li, Zhiyuan & He, Hongbo & Hou, Wenxuan, 2021. "The determinants of R&D smoothing with asset sales: Evidence from R&D-intensive firms in China," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 76-93.
    6. Andrea Mercatanti & Taneli Mäkinen & Andrea Silvestrini, 2017. "Investment decisions by European firms and financing constraints," Temi di discussione (Economic working papers) 1148, Bank of Italy, Economic Research and International Relations Area.
    7. Sylvain Catherine & Thomas Chaney & Zongbo Huang & David Sraer & David Thesmar, 2022. "Quantifying Reduced‐Form Evidence on Collateral Constraints," Journal of Finance, American Finance Association, vol. 77(4), pages 2143-2181, August.
    8. Stella Mendes Carneiro & Marcio Issao Nakane, 2020. "The perils of crossing borders: The financial constraints of Brazilian exporters during the 2009 Global Trade Collapse," Working Papers, Department of Economics 2020_01, University of São Paulo (FEA-USP).
    9. Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan & Tarhan, Vefa, 2017. "The impact of liquidity crises on cash flow sensitivities," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 225-239.
    10. Klaas Mulier & Koen Schoors & Bruno Merlevede, 2014. "Investment-Cash Flow Sensitivity and the Cost of External Finance," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/890, Ghent University, Faculty of Economics and Business Administration.
    11. Marc Arnold & Dirk Hackbarth & Tatjana Xenia Puhan, 2018. "Financing Asset Sales and Business Cycles [Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries]," Review of Finance, European Finance Association, vol. 22(1), pages 243-277.
    12. Horvath, Akos & Lang, Peter, 2021. "Do loan subsidies boost the real activity of small firms?," Journal of Banking & Finance, Elsevier, vol. 122(C).
    13. Sasan Bakhtiari & Robert Breunig & Lisa Magnani & Jacquelyn Zhang, 2020. "Financial Constraints and Small and Medium Enterprises: A Review," The Economic Record, The Economic Society of Australia, vol. 96(315), pages 506-523, December.
    14. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.
    15. Schauer, Catharina & Elsas, Ralf & Breitkopf, Nikolas, 2019. "A new measure of financial constraints applicable to private and public firms," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 270-295.
    16. repec:hal:wpspec:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu is not listed on IDEAS
    17. Bucă, Andra & Vermeulen, Philip, 2017. "Corporate investment and bank-dependent borrowers during the recent financial crisis," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 164-180.
    18. repec:spo:wpmain:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu is not listed on IDEAS
    19. repec:spo:wpecon:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu is not listed on IDEAS
    20. Malik, Muhammad Farhan & Nowland, John & Buckby, Sherrena, 2021. "Voluntary adoption of board risk committees and financial constraints risk," International Review of Financial Analysis, Elsevier, vol. 73(C).
    21. Mulier, Klaas & Schoors, Koen & Merlevede, Bruno, 2016. "Investment-cash flow sensitivity and financial constraints: Evidence from unquoted European SMEs," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 182-197.
    22. repec:hal:spmain:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu is not listed on IDEAS
    23. Williamson, Rohan & Yang, Jie, 2021. "Tapping into financial synergies: Alleviating financial constraints through acquisitions," Journal of Corporate Finance, Elsevier, vol. 68(C).
    24. Söhnke M. Bartram, 2017. "Corporate Postretirement Benefit Plans and Real Investment," Management Science, INFORMS, vol. 63(2), pages 355-383, February.

    More about this item

    Keywords

    credit constraints; financial crisis; debt policy; entrepreneurial finance; employment growth; real activity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_5458. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.