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Government lending in a crisis
Iowa State Univ, Ivy Coll Business, Dept Finance, 2333 Gerdin Business Bldg, Ames, IA 50011 USA..
KTH, School of Industrial Engineering and Management (ITM), Centres, Centre of Excellence for Science and Innovation Studies, CESIS. KTH Royal Inst Technol, Swedish House Finance SHoF, Lindstedtsvagen 30, SE-10044 Stockholm, Sweden..ORCID iD: 0000-0002-9311-3914
KTH, School of Industrial Engineering and Management (ITM), Centres, Centre of Excellence for Science and Innovation Studies, CESIS.ORCID iD: 0000-0002-4381-5280
2021 (English)In: Journal of Corporate Finance, ISSN 0929-1199, E-ISSN 1872-6313, Vol. 71, p. 102116-, article id 102116Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
Elsevier BV , 2021. Vol. 71, p. 102116-, article id 102116
Keywords [en]
Liquidity management, Financial crisis, Government policy, Leverage, Financial distress, COVID-19 policy
National Category
Business Administration Economics
Identifiers
URN: urn:nbn:se:kth:diva-305324DOI: 10.1016/j.jcorpfin.2021.102116ISI: 000716715600003Scopus ID: 2-s2.0-85118275344OAI: oai:DiVA.org:kth-305324DiVA, id: diva2:1615782
Note

QC 20211201

Available from: 2021-12-01 Created: 2021-12-01 Last updated: 2022-06-25Bibliographically approved

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Martinsson, GustavThomann, Christian

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