Firm growth and financial constraints: evidence from a policy-based loan program

Credit supply to small businesses may ease financial frictions, helping them grow faster and re-optimize the factor inputs for production, particularly when lumpy and/or long-term investment is required. We study how government loan programs address these two issues by combining the loan-level data with firms' financial statements. We find that, with additional credit supplied by government, (i) small businesses are able to grow faster than similar firms, (ii) financially constrained firms invest relatively more on capital, and (iii) firms invest in long-term projects. We also find that differences in debt levels are persistent over time, suggesting that private credit supply does not substitute for the government-provided credit.