What Do Development Banks Do? Evidence from Brazil, 2002-2009
Abstract: Governments, in theory, use development banks to either alleviate capital constraints, benefit politically-connected capitalists, or bail out inefficient firms. Using a new database of publicly-traded firms between 2002-2009, we study the effect of loans and equity investments of the Brazilian National Development Bank (BNDES) on firm performance and investment and find that they do no significant effect, except for a reduction in financial expenditures when companies receive subsidized loans from this bank. We show, however, that BNDES does not systematically lend to underperforming firms. Firms that receive subsidized loans tend to be good performers and those that donate to political candidates who win elections. Therefore, our results reject the view of development banks are used as bailout mechanisms, yet indicate that loans are transferring subsidies to large firms without any substantial firm-level improvement in performance or increase in investment.
