Local Bank Financial Constraints and Firm Access to External Finance

suggests that program participation was potentially induced by liquidity shortages. A similarcorrelation does not exist with the expected program financing variable (columns 2 and 3 ofTable IX), neither within the sample of banks that participated in the program or in the entiresample of banks. Expected financing is not significantly related to the proxies of either liquidityshocks or changes in investment opportunities. These results corroborate that the expectedprogram financing variable is a suitable candidate as an instrument for bank sources of capital.Targeting Requirements of the ProgramThe program rules required banks to use the program resources to extend new loans to smallenterprises. A potential alternative interpretation of the results of the paper is that banksexpanded lending in order to comply with the program rules and secure access to cheap fundingfrom future waves of the program. Figure 1 showed some preliminary evidence that bankscould exploit the fungibility of resources to comply with the allocation rule and at the same timeallocate the additional funds without restrictions. This was accomplished by crowding-out or relabelingexisting loans of bank clients that met the targeting criteria (firms with less than$200,000 in annual sales and 20 workers).This subsection provides additional evidence that the allocation rule was not binding. First,the lending expansion that resulted from the increase in available external finance was mostlyallocated to firms that were not eligible to the program. This can be shown by estimating thewithin firm specification (IV-7) over two subsamples of firms: eligible and non-eligible to theMYPES program. 17 If the targeting rule were binding, one would expect the external financingshock to affect the amount of borrowing of eligible firms, and be zero otherwise. On thecontrary, the results in Table VII (columns 5 and 6) show that the observed total expansion in36