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Government lending in a crisis

Author

Listed:
  • Brown, James R.
  • Martinsson, Gustav
  • Thomann, Christian
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. The leverage increase is due entirely to higher levels of non-bank debt. 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.

Suggested Citation

  • Brown, James R. & Martinsson, Gustav & Thomann, Christian, 2021. "Government lending in a crisis," Journal of Corporate Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:corfin:v:71:y:2021:i:c:s0929119921002388
    DOI: 10.1016/j.jcorpfin.2021.102116
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    1. Taghizadeh-Hesary, Farhad & Phoumin, Han & Rasoulinezhad, Ehsan, 2022. "COVID-19 and regional solutions for mitigating the risk of SME finance in selected ASEAN member states," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 506-525.
    2. Bertoni, Fabio & Colombo, Massimo G. & Quas, Anita, 2023. "The long-term effects of loan guarantees on SME performance," Journal of Corporate Finance, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Liquidity management; Financial crisis; Government policy; Leverage; Financial distress; COVID-19 policy;
    All these keywords.

    JEL classification:

    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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