IDEAS home Printed from https://ideas.repec.org/p/bcb/wpaper/599.html

Do Firms Need Cheaper Credit to Grow? investigating the effectiveness of subsidized earmarked loans

Author

Listed:
  • Daniel Grimaldi
  • Jose Renato Haas Ornelas

Abstract

This paper explores a unique event that abruptly and unexpectedly increased the subsidy levels associated with a traditional earmarked credit line in Brazil. Using a local difference-in-differences approach, we find strikingly different results depending on firms’ size. For mid-large firms, despite an increase in subsidy intake of almost 90%, there were no relevant effects on employment or debt, suggesting they mostly used new loans to replace older (more expensive) debt. For smaller firms, we observed a similar increase in the dosage of subsidies, but we also saw an increase in earmarked debt (roughly 75%) and employment (around 6% in the number of employees and 10% in the payroll). However, all labor-related effects were short-lived and vanished after two years. A cost-effectiveness analysis for a two-year window shows that monthly credit subsidies were higher than the increase in the affected firm’s monthly payroll by BRL 393 for micro and small firms and by BRL 165,685 for mid-large firms.

Suggested Citation

  • Daniel Grimaldi & Jose Renato Haas Ornelas, 2024. "Do Firms Need Cheaper Credit to Grow? investigating the effectiveness of subsidized earmarked loans," Working Papers Series 599, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:599
    as

    Download full text from publisher

    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/WP599v2.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
    2. Bonomo, Marco & Brito, Ricardo D. & Martins, Bruno, 2015. "The after crisis government-driven credit expansion in Brazil: A firm level analysis," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 111-134.
    3. 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.
    4. J. David Brown & John S. Earle, 2017. "Finance and Growth at the Firm Level: Evidence from SBA Loans," Journal of Finance, American Finance Association, vol. 72(3), pages 1039-1080, June.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Choi, Sangyup & Furceri, Davide & Huang, Yi & Loungani, Prakash, 2018. "Aggregate uncertainty and sectoral productivity growth: The role of credit constraints," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 314-330.
    9. Baker, Andrew C. & Larcker, David F. & Wang, Charles C.Y., 2022. "How much should we trust staggered difference-in-differences estimates?," Journal of Financial Economics, Elsevier, vol. 144(2), pages 370-395.
    Full references (including those not matched with items on IDEAS)

    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. Akcigit, Ufuk & Seven, Ünal & Yarba, İbrahim & Yılmaz, Fatih, 2024. "Firm-level impact of public credit guarantees," European Economic Review, Elsevier, vol. 170(C).
    2. Bruhn, Miriam & Ortega Hernandez, Johan Andrey & Ruiz Ortega, Claudia, 2025. "Do Formal Loans Boost SME Performance ? Key Takeaways from a Meta-Analysis," Policy Research Working Paper Series 11140, The World Bank.
    3. Dimelis, Sophia & Giotopoulos, Ioannis & Louri, Helen, 2015. "Can firms grow without credit?: evidence from the Euro Area, 2005-2011: a quantile panel analysis," LSE Research Online Documents on Economics 61157, London School of Economics and Political Science, LSE Library.
    4. Falavigna, Greta & Ippoliti, Roberto, 2023. "SMEs’ behavior under financial constraints: An empirical investigation on the legal environment and the substitution effect with tax arrears," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    5. Khan, Habib Hussain & Qureshi, Fiza & Jamali, Dima, 2025. "Digital disruption in financing: Are fintech and bigtech credit reshaping corporate access to capital?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 103(C).
    6. Evguenia Bessonova & Svetlana Popova & Konstantin Styrin, 2024. "The Effect of Subsidized Lending Programs on the Economic Performance of Small and Medium-Sized Enterprises: Evidence from Russia," Bank of Russia Working Paper Series wps140, Bank of Russia.
    7. Rahman Ashiqur & Rahman M. Twyeafur & Belas Jaroslav, 2017. "Determinants of SME Finance: Evidence from Three Central European Countries," Review of Economic Perspectives, Paradigm, vol. 17(3), pages 263-285, September.
    8. Sophia Dimelis & Ioannis Giotopoulos & Helen Louri, 2013. "The credit crunch and firm growth in the euro area: 2005-2011. A quantile panel analysis," Working Papers 165, Bank of Greece.
    9. Philippe Adair & Mohamed Adaskou, 2020. "Credit Rationing and Mature French SMEs: A Disequilibrium Model," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(1), pages 55-72, June.
    10. Edoardo Ferrucci & Roberto Guida & Valentina Meliciani, 2021. "Financial constraints and the growth and survival of innovative start‐ups: An analysis of Italian firms," European Financial Management, European Financial Management Association, vol. 27(2), pages 364-386, March.
    11. Maria Luisa Mancusi & Andrea Vezzulli, 2014. "R&D AND CREDIT RATIONING IN SMEs," Economic Inquiry, Western Economic Association International, vol. 52(3), pages 1153-1172, July.
    12. Cziráki, Péter, 2007. "A tőkestruktúra empirikus vizsgálata a magyar és az osztrák tőzsdén jegyzett vállalatok körében [An empirical investigation of the capital structure of Austrian and Hungarian listed companies]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 703-715.
    13. ElBannan, Mona A., 2017. "Stock market liquidity, family ownership, and capital structure choices in an emerging country," Emerging Markets Review, Elsevier, vol. 33(C), pages 201-231.
    14. Ullah, Barkat, 2025. "Corporate environmental responsibility and financial constraints for unlisted SMEs," Global Finance Journal, Elsevier, vol. 67(C).
    15. Cao, Ning & McGuinness, Paul B. & Xi, Chao, 2024. "Majority-of-the-minority shareholder votes and investment efficiency," Journal of Corporate Finance, Elsevier, vol. 89(C).
    16. Diana Bonfim & Cláudia Custódio, 2021. "The sensitivity of SME’s investment and employment to the cost of debt financing," Working Papers w202115, Banco de Portugal, Economics and Research Department.
    17. Jaehoon Hahn & Hangyong Lee, 2009. "Financial Constraints, Debt Capacity, and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(2), pages 891-921, April.
    18. Bruder, Jana & Neuberger, Doris & Räthke-Döppner, Solvig, 2008. "Financial constraints of ethnic entrepreneurship: Evidence from Germany," Thuenen-Series of Applied Economic Theory 84, University of Rostock, Institute of Economics.
    19. Philippe Adair & Mohamed Adaskou, 2017. "The capital structure of French SMEs and impact of the financial crisis: A dynamic panel data analysis (2002-2010)," Working Papers hal-01667313, HAL.
    20. Michael Pfaffermayr & Matthias Stöckl & Hannes Winner, 2013. "Capital Structure, Corporate Taxation and Firm Age," Fiscal Studies, Institute for Fiscal Studies, vol. 34(1), pages 109-135, March.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:bcb:wpaper:599. 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: Rodrigo Barbone Gonzalez (email available below). General contact details of provider: https://www.bcb.gov.br/en .

    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.