Short-term Finance, Long-term Effects

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