Short-term Finance, Long-term Effects

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. These effects are tested by studying a loan guarantee program (LGP) designed to relax short-term financial constraints in Morocco. Our difference-in-difference (DID) estimates show that (i) guaranteed firms expand their production scale persistently by increasing sales, capital input, and labor input relative to their matched peers and (ii) they decrease their cash-to-asset ratio. Fitting the quantitative model to Moroccan data 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 both increasing the guaranteed ratio and decreasing the participation costs. These two policies generate substantial growth and welfare gains, with the former generating relatively more growth and the former increasing participation relatively more.