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Virtual seminar: Claudia Custodio - Imperial College London

Wednesday, 16 June 2021
15:30 to 17:00
Claudia Custodio
Virtual event

Topic: The sensitivity of SME’s investment and employment to the cost of debt financing

Seminar organised by the Centre for Banking, Institutions and Development (CBID) and Department of Economics and Finance.


We use variation in the access to a credit certification program in Portugal to estimate the sensitivity of small and medium sized firms (SMEs)´ investment and employment to the cost of debt financing. This government program provides a two-tier credit certification and a loan guarantee to firms with a minimum credit quality. The program design allows for a multidimensional regression discontinuity methodology to estimate its real effects over a decade. We find that eligible firms increase their borrowing, and obtain bank loans at significantly lower rates than non-eligible firms during the crisis. These firms increase investment and employment by more when compared to non-targeted firms. A decrease of 1 percentage point (p.p) in the cost of debt financing is associated with a contemporaneous increase of 1 p.p in fixed assets growth, 0.5 p.p in working capital growth and 0.25 p.p increase in employment growth. Fixed capital investment and employment effects persist for two years. Targeted firms also show an increase in sales growth, including exports. While these effects are mostly observed during the crisis, ensuring that small firms continued to invest, financial and real effects of the program are modest post-crisis. Last, we exploit variation in the two certification tiers to estimate the effect of having the top rating. Rating affects mostly impact sales growth directly post-crisis.