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

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 e↵ects 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 e↵ects persist for two years. Targeted firms also show an increase in sales growth, including exports. While these e↵ects are mostly observed during the crisis, ensuring that small firms continued to invest, financial and real e↵ects of the program are modest post-crisis. Last, we exploit variation in the two certification tiers to estimate the e↵ect of having the top rating. Rating e↵ects mostly impact sales growth directly post-crisis.