Short-term Finance, Long-term Effects: Theory and Evidence from Morocco

Kenza Benhima, Omar Chafik, Min Fang and Wenxia Tang ()
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Wenxia Tang: Department of Economics, University of Lausanne

No 2003, Working Papers from University of Florida, Department of Economics

Abstract: We study the effect of working capital loan guarantee programs on firm growth and their aggregate implications. Using a Moroccan firm-level dataset, we show that firms with guaranteed short-term loans (i) decrease their cash ratio, (ii) expand their production scale homogeneously and persistently, and that (iii) participation in the guarantee program is humped- shaped in firm size. We rationalize these findings in a heterogeneous-firm model with collateral and working capital constraints. First, we show that while relaxing collateral constraints on short-term loans always has a positive short-term effect on firm growth as firms reallocate cash to capital, persistent effects on firm scale depend on the existence and size of intertemporal distortions. Second, the combination of a flat fixed participation cost and size-dependent collateral constraints explain the non-monotonous participation rate. The interaction of the collateral constraint with these two frictions is crucial to determine the aggregate effect of a loan guarantee program. We parameterize the model to our Moroccan firm-level data. We show that the growth and welfare gains of expanding credit guarantee programs through a higher guaranteed amount or a lower participation cost are substantial, with the former generating relatively more growth while also increasing participation.

JEL-codes: E22 E27 E44 G28 G38 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-ara, nep-bec, nep-cfn, nep-ent, nep-fdg and nep-sbm
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Working Paper: Short-term Finance, Long-term Effects: Theory and Evidence from Morocco (2023)
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