The Sensitivity of SME’s Investment and Employment to the Cost of Debt Financing

Abstract

We use variation in the access to a government credit certification program in Portugal to estimate the sensitivity of SMEs investment and employment to the cost of debt financing. Targeted firms have access to a credit certification and loan guarantees. We use a multidimensional regression discontinuity design to estimate real effects. Eligible firms increase borrowing and obtain bank loans at lower rates than non- eligible firms, allowing them to increase investment and employment during crises. Eligible firms also exhibit increased return on assets and default less. Industry-level analysis shows reduced heterogeneity in access to credit in more exposed industries.