Short-term Finance, Long-term Effects

64 Pages Posted: 25 Mar 2024 Last revised: 3 Apr 2024

See all articles by Kenza Benhima

Kenza Benhima

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR)

Omar Chafik

Independent

Min Fang

University of Florida - Department of Economics

Wenxia Tang

University of Lausanne

Date Written: April 1, 2024

Abstract

We study the effect of short-term finance on firm growth and its aggregate implications in emerging economies. In theory, short-term finance promotes firm growth by enabling entrepreneurs to allocate their net worth more efficiently away from unproductive cash and towards productive capital. Importantly, these effects are persistent only if firms face intertemporal distortions in the form of exit risk or a tax on net worth. The quantitative model fitted to Moroccan data replicates qualitatively and quantitatively the observational impacts of a loan guarantee program (LGP) designed to relax short-term financial constraints. Fitting the model to the data also reveals that intertemporal distortions are large and that the costs of participating in the LGP are high. This implies that there are potentially large gains from increasing the guaranteed ratio and decreasing the participation costs. These two policies generate substantial growth and welfare gains, with the former generating relatively higher growth and the latter motivating relatively more participation.

Keywords: SME financing; financial frictions; liquidity constraints; developing economy;

JEL Classification: O11, O16, E22, E44, G28, G38

Suggested Citation

Benhima, Kenza and Chafik, Omar and Fang, Min and Tang, Wenxia, Short-term Finance, Long-term Effects (April 1, 2024). Available at SSRN: https://ssrn.com/abstract=4770242

Kenza Benhima

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Omar Chafik

Independent ( email )

Min Fang (Contact Author)

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32606
United States

HOME PAGE: http://www.minfang.info

Wenxia Tang

University of Lausanne ( email )

Switzerland

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