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How does government-backed finance affect SMEs' crisis predictors?

Lorenzo Gai¹, Maria Cristina Arcuri², Federica Ielasi¹

¹Department of Economics and Management, University of Florence, Via Delle Pandette, 9, 50127 Florence, Italy.

Small Business Economics

|April 16, 2024

Summary

Public guarantees positively impact small and mid-size enterprises (SMEs) profitability short-term. While initial financial health may dip, debt burdens ease within two years, preventing firm zombification.

Keywords:

Business continuity Central Guarantee Fund Credit risk Public guarantees SMEs

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Area of Science:

Economics
Financial Management
Public Policy

Background:

Small and mid-size enterprises (SMEs) are crucial economic drivers but face financial vulnerabilities.
Public credit guarantee schemes aim to mitigate SME financing risks and support their growth.
Understanding the precise impact of these guarantees on SME financial health and crisis indicators is vital for effective policy design.

Purpose of the Study:

To estimate the impact of public guarantees on crisis predictive indicators for SMEs.
To analyze the short- and medium-term effects of guarantees on SME profitability and financial health.
To identify factors that amplify the economic and financial effects of government-backed loans.

Main Methods:

Utilized a confidential database of guarantees from the Italian Central Guarantee Fund.
Applied difference-in-difference regressions and propensity-score matching estimators.
Analyzed a sample of approximately 40,000 SMEs over the 2010-2018 period.

Main Results:

Public guarantees improve SME profitability in both the short and medium term.
SME financial health initially worsens but shows alleviation of financial burdens two years post-guarantee.
Effects are amplified for micro-sized firms, service sector companies, and direct guarantees.

Conclusions:

Public guarantees can effectively enhance SME profitability and alleviate debt overhang.
Scheme design should consider firm size, sector, and guarantee type for maximum impact.
These findings support policymakers in designing credit guarantee schemes to prevent SME zombification.