Firm Growth, Financial Constraints, andPolicy-Based Finance

We study how government loan programs affect the growth of small businesses by examin-ing a unique policy-based small business lending program in Japan. Combining the loan-level program data with a financial statement database, we find that small business bor-rowers increase employment and asset levels after receiving the loan and that these effectspersist for several years. Differences in debt levels are persistent over time, cash holdings ofloan recipients fall in the long run, and the effects on asset levels are larger in magnitudethan those on employment. In addition, the effects are larger in magnitude for firms iden-tified as financially constrained. These results suggest that the government loan programis successful in relaxing binding financial constraints for small businesses that participatein the program.