Subsidy-driven firm growth: does loan history matter? Evidence from a European Union subsidy program

Tirupam Goel, Álmos Telegdy, Ádám Banai and Elod Takats

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Subsidies should target firms with profitable opportunities and insufficient funding, but this is difficult due to information asymmetry between firms and the government. We study how credit history of firms can help design more efficient subsidies. To this end, we combine data on non-repayable firm subsidies and the credit registry from Hungary. Using subsidy winners and losers as treated and control groups and leveraging variation in access to loans, we identify the differential impact of subsidies. While subsidies lead to an incremental impact on assets of loan-deprived as compared to loan-acquiring firms, the impact is transitory and fades after a few years. The impact on profitability follows a similar pattern despite the higher expected marginal value of capital for loan-deprived firms. Thus, loan deprivation is likely caused by borrower shortcomings instead of credit rationing by banks. In such cases, subsidies need not target loan-deprived firms.

Keywords: credit constraints; credit registry; Hungary; SME subsidies (search for similar items in EconPapers)
JEL-codes: G21 G38 H25 H32 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-08-01
New Economics Papers: this item is included in nep-eec, nep-eur and nep-sbm
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Published in Journal of Corporate Finance, 1, August, 2024, 87. ISSN: 0929-1199

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http://eprints.lse.ac.uk/123735/ Open access version. (application/pdf)

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Journal Article: Subsidy-driven firm growth: Does loan history matter? Evidence from a European Union subsidy program (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:123735

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