Short-term Finance, Long-term Growth : Evidence from a Loan Guarantee Program in Morocco

We study the effect of short-term finance on firm growth and its aggregate implications. Using a unique firm-level dataset of a credit guarantee program in Morocco, we show that firms with guaranteed short-term loans expand their production scale homogeneously and sharply decrease their cash holdings, especially younger and smaller firms. More importantly, firms expand their production scale permanently and do not experience any growth reversal. These findings are consistent with a heterogeneous-firm model with both collateral and working capital constraints. In the model, firms inefficiently allocate resources to cash and away from the capital, converging to smaller long-run scales. We parameterize the model to our Moroccan firm-level data and quantify the role of frictions in short-term finance on firm growth. Finally, we show quantitatively that the growth and welfare gains from alleviating such financial frictions by expanding credit guarantee programs are substantial