Government Lending in a Crisis

27 Pages Posted: 28 Oct 2020 Last revised: 21 Jun 2021

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK); Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students; Institute for Financial Research (SIFR)

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies; Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students

Date Written: October 20, 2020

Abstract

The economic disruption from the COVID-19 pandemic prompted governments around the world to initiate an unprecedented number of temporary lending and tax deferment programs. Which firms will benefit from these programs? What are the implications for firm balance sheets and post-crisis survival? We provide some novel insights on these questions by studying one of the first government programs of this type, which Sweden launched at the height of the 2008-2009 financial crisis. The Swedish program allowed firms to temporarily suspend payment of all labor-related taxes and fees, treating these deferred amounts as a short-term loan from the government. Firms participating in the program are younger, less profitable, hold fewer cash reserves, are more leveraged, and have less unused slack in their credit lines when the crisis hits. Given the structure of the Swedish program, it provided more liquidity to firms with relatively larger ex ante wage bills. Exploiting this feature of the policy, we find that firms use the program to increase overall debt levels rather than to substitute for other borrowing. Firms use the funds to avoid making even deeper cuts to current assets. Despite the increase in leverage, access to the lending program is unrelated to the likelihood a firm files for bankruptcy and is negatively related to the likelihood a firm encounters severe financial distress in the years immediately following the crisis.

Keywords: Liquidity, Financial crisis, Government policy, Leverage, Financial distress, COVID-19 policy

JEL Classification: H12, H81, G01, G18, G32, G33

Suggested Citation

Brown, James R. and Martinsson, Gustav and Thomann, Christian J., Government Lending in a Crisis (October 20, 2020). Swedish House of Finance Research Paper No. 20-28, Available at SSRN: https://ssrn.com/abstract=3716533 or http://dx.doi.org/10.2139/ssrn.3716533

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Gustav Martinsson

Royal Institute of Technology (KTH) - Department of Industrial Economics and Management (INDEK) ( email )

Stockholm, 100 44
Sweden

HOME PAGE: http://https://www.kth.se/profile/gusma

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

Institute for Financial Research (SIFR) ( email )

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies ( email )

Lindstedtsvägen 30-100 44
Stockholm, SE-100 44
Sweden

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

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