Finance and Growth at the Firm Level: Evidence from SBA Loans
Brown and Earle, JF 2017
Main Question (General and Specific) and Results
This paper studies the real effects of finance. Specifically, it looks at how loans partially guaranteed by the Small Business Administration (SBA loans) generate jobs. It finds that jobs increase by 3-3.5 at the firm-level for each $1 million in SBA loans, which translates to a taxpayer cost of $21-25K per job.
The main contribution is the data: the authors have micro-level loan data with a long times-series and a sizeable cross-section. Previous studies relied on coarser approximations, such as the effect of SBA credit supply on county-level employment, or used micro-data that is limited cross-sectionally or in the times-series.
The authors match firms that received SBA loans with those that did not based on age, industry, size, year, and growth history, made possible by the richness of their micro-data.
To address selection into receiving an SBA loan and the amount obtained, the authors rely on institutional details. Lenders that obtain preferred lender status (PLP) in the Preferred Lender Program are granted lower administrative costs when they obtain partial loan guarantees through the SBA program. This gives rise to an all-or-nothing participation strategy at the bank level. Indeed, “a large share” of all SBA loans are generated by PLP lenders. SBA loans account for only 1% of total bank business, making it unlikely that SBA demand drives banks’ locational decisions. This is important because SBA lending is highly local — 96.8% of SBA loans are given to borrowers in counties in which there was at least one PLP lender. PLP lenders are dispersed unevenly throughout the county and change over time, strengthening identification.
The conclusion, that financing has real effects, has been found in previous papers (e.g. Chodorow-Reich, QJE 2014; Mondragon, 2015). This paper corroborates the existing literature by looking into a specific institutional setting, SBA loans.