Abstract
Policymakers around the world have created several schemes to support financially constrained SMEs. However, whether these mechanisms improve the access to external sources of finance or on the contrary crowd out private players remains a relevant question. In this paper, we study the effectiveness of a recent form of government support, called participative loan, in improving recipient SMEs’ access to external financial debt. Relying on the literature about the certification effect, we develop hypotheses on the conditions under which the improvement is stronger. The empirical analysis is based on a sample of 488 Spanish SMEs that received participative loans from a Spanish government agency and a control group of 719 matched twins. We show that the former register a significantly higher external financial debt (+31.5%). The effect is stronger for smaller firms, or for those operating in high-technology sectors, which suffer more acutely from information asymmetries, and negligible for firms that already received a support from another government-supported institution. After ruling out alternative explanations, we interpret this result as a positive evidence of government certification of SMEs towards banks.
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Notes
Additionally, with respect to governmental VC, government agencies awarding PLs do not need to negotiate the initial price, are not limited by the presence of exit opportunities (which are scarce in Europe), and do not participate in the boards of directors of target firms. This last difference limits the hands on approach of the government in the firms’ businesses, which however seems to be of scarce value added (Alperovych et al. 2015).
Other governmental agencies outside Spain have used PLs and similar hybrid instruments to support SMEs. An example is the Boost’PME program of PLs granted by the French ISODEV agency (OECD 2015).
This clause may generate misalignment between the objectives of the governmental agency awarding PLs and those of commercial banks. The agency may be more inclined to finance high-risk high-return projects which would not be attractive for commercial banks. However, the provision of additional equity capital from firms’ shareholders reduces this risk. First, the equity capital increases the company’s liquidity, and therefore reduces its risk of default. Second, shareholders have more equity at stake, and therefore are less likely to take huge risks with their company.
There are two main reasons why we opted for an absolute measure of debt instead of a relative measure (such as debt on total assets). First, debt on total assets is by definition constrained to be between 0 and 100% and undervalues increases in debt when the equity amount is high. Second, all relative measures of debt (debt on total assets or debt on equity) also depend on equity. However, firms that received PLs are requested to increase their equity capital. Therefore, we believe that an absolute measure of debt is best suited for our study. Nevertheless, when we replace logDebt i,t with those relative measures the results, which are available from the authors upon request, are similar to those reported in section 4.
CDTI (Centro para el Desarrollo Tecnológico e Industrial, dependent on the Spanish Ministry of Industry, Energy, and Tourism) and ACCIO (Agencia para la Competitividad de la Empresa, dependent on the regional government of Catalonia) are the two main providers of subsidized loans in Spain. Other regional governments started similar initiatives only recently, namely after 2010.
High-technology manufacturing industries include NACE Rev. 2 codes 21 (manufacture of basic pharmaceutical products and pharmaceutical preparations), 26 (manufacture of computer, electronic and optical products), and 30.3 manufacture of air and spacecraft and related machinery (NACE Rev. 2 code 30.3). High-technology knowledge-intensive services include NACE Rev. 2 codes 59 (motion picture, video and television programs production, sound recording, and music publishing activities), 60 (programming and broadcasting activities), 61 (telecommunications), 62 (computer programming, consultancy and related activities), 63 (information service activities), and 72 (scientific research and development) (Eurostat 2015).
We incorporated in our sample the entire Webcapitalriesgo database in order to have a good coverage of the population of firms that received support from other government-affiliated institutions or from venture capitalists in our sample of nonENISA-backed firms, which is required to test hypotheses 5 and 6. Although based on a smaller sample, results are similar if we rely purely on the Orbis database to select the control group.
As robustness checks, we replicated our analysis using 1:1 and 1:3 matching algorithms, and without the exact matching on the age of the company. We obtain similar results to those reported in this work, which are available upon request.
Results are also robust when using the 2SLS-IV approach (Angrist et al. 1996) as an alternative control for endogeneity.
In particular, we estimate the impact of PL i,t on Tangibles i,t using a fixed effects model and considering the same set of control variables used in the main analysis. Results are available upon request.
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Acknowledgements
We thank Joern Block, Massimo Colombo and Silvio Vismara, and the two anonymous referees for their constructive comments. We acknowledge the financial assistance from the Spanish Ministry of Economics and Competitiveness (ECO2014-55674-R).
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Martí, J., Quas, A. A beacon in the night: government certification of SMEs towards banks. Small Bus Econ 50, 397–413 (2018). https://doi.org/10.1007/s11187-016-9828-4
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DOI: https://doi.org/10.1007/s11187-016-9828-4
Keywords
- Certification hypothesis
- Participative loans
- Long-term financing
- Government intervention
- Subsidized loans