Strategically Small Firms and the Real Effects of Public Grants During a Crisis

Abstract

We investigate whether strategically small firms that avoid surpassing sizedependent regulations in non-crisis periods may have benefited more from public resources during crisis periods. We define strategically small firms as those positioning themselves below either of two thresholds: (i) €6 million revenues, implying less stringent tax and its oversight, or (ii) 50 employees, benefiting from looser labor laws and reduced financial disclosure. We document systematic firms' bunching below the revenues and employees thresholds, suggesting that these regulations may discourage firm growth. We do not observe similar behaviors at other thresholds for accounting and auditing requirements. We then show that these firms were more likely to obtain public funding during the crisis, relative to firms just above the thresholds. Despite accessing more public resources, strategically small firms do not outperform their counterparts in terms of growth or performance during and after the crisis. Overall, we document that size-dependent regulations generate strategically small firms whose behaviors in good times have unintended effects on public resource allocation in crisis times.

Keywords: small firms, size-dependent regulations, public resources, non-market financing, performance, crisis

JEL Classification: G32, G34, M1