Journal Article

Are Small Businesses Worthy of Financial Aid? Evidence from a French Targeted Credit Program

Laurent Bach

in Review of Finance

Published on behalf of European Finance Association

Volume 18, issue 3, pages 877-919
Published in print July 2014 | ISSN: 1572-3097
Published online June 2013 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1093/rof/rft022
Are Small Businesses Worthy of Financial Aid? Evidence from a French Targeted Credit Program

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We ask whether public financial aid reduces small businesses’ credit constraints. To answer the question, we analyze a policy of bank loans made from subsidized funds. Extensions of this large program are plausibly exogenous and help identify its effects. Using firm-level data, we find that the program substantially increases debt financing without substitution between subsidized and unsubsidized finance. Returns on subsidized debt are significantly above its market cost, with no subsequent surge in default risk. We interpret this as evidence that targeted firms are credit-constrained and underline the implied welfare differences between upfront financial aid and public guarantees.

Keywords: G21; G28; L8

Journal Article.  16619 words.  Illustrated.

Subjects: Financial Regulation ; Banking ; Services

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