Financial constraints: state aid to the rescue?

Ilona Sergant

No 553939, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: This paper investigates the relationship between state aid measures as defined by Article 107 of the TFEU, and firm performance in terms of total factor productivity (𝑇𝐹𝑃). Under imperfect capital markets, firms might encounter difficulties in accessing sufficient resources to fund their optimal investment plans. The main focus of this paper lies in establishing whether state aid alleviates a firm from such constraints, and thereby enhances efficiency. To this end, we use all state aid cases that were active in Belgian manufacturing between 2002 and 2011. To determine the effects of state aid and financing constraints on performance, we first estimate TFP and classify firms according to their financial health in the absence of aid. The main results confirm the hypothesis but when allowing for firm heterogeneity, the mitigating role of state aid is only present for initially efficient firms.

Date: 2016
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Published in Working paper , pages 1-34

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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:553939

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