What Do 25 Million Records of Small Businesses Say about the Effects of the PPP? 
In response to the COVID-19 crisis, the US Congress created the Paycheck Protection Program (PPP), which offered government-guaranteed loans and grants to small and medium-sized businesses. The program’s goal was to preserve jobs at these firms, which had been hit especially hard by the pandemic-induced contraction in economic activity. This paper uses the Dun & Bradstreet database, which reports the financial condition and overall commercial viability of nearly 25 million firms, to study the allocation and effects of the PPP. It looks at how PPP allocation differed across firms with different pre-COVID financial-health profiles, how receiving a PPP loan affected a firm’s financial condition in the short and medium runs, and how the effects depended on a firm’s pre-pandemic financial condition. The paper also examines how accounting for firms’ pre-pandemic financial health affects the estimated impact of the PPP on employment.
Key Findings
- More creditworthy firms were more likely to receive a PPP loan in the 2020 round and to receive it earlier. Firms that received PPP loans before mid-April 2020 were 18 percent less risky than those that received PPP loans after early May, even among firms within the same state, industry, age group, size group, and other, more stringent within-group comparisons (such as county, Zip code, and three- and four-digit North American Industry Classification System [NAICS]). Even these later PPP borrowers were 26 percent less risky than firms that did not receive PPP loans in 2020.
- PPP borrowers became 18 percent less risky four quarters after they received a PPP loan relative to their peers that did not receive a PPP loan in 2020, when the heterogeneity in firms' pre-COVID financial health is accounted for.
- Firms that received loans later in the first round of the PPP exhibited greater improvement in their financial condition compared with earlier recipients within the same state, industry, age group, and size group. The relative improvement is even greater when the comparison is further restricted to firms with similar pre-pandemic financial and commercial viability ratings.
- When firms' pre-pandemic financial and commercial viability is accounted for, instrumental variables for PPP allocation that are used in previous empirical studies generally lose their explanatory power for the allocation of PPP loans and subsequent employment recovery in the county.
Implications
The paper’s results show that firms' financial condition is an economically significant source of both selection into treatment (allocation of PPP loans) and heterogeneity in treatment effects (the impact of PPP loans). This finding implies that firms' financial condition and the resulting loan allocation must be directly accounted for to estimate the PPP’s effects on a representative set of borrowers. Otherwise, the estimate would capture the PPP’s effect on a subset of firms that is endogenously determined, and the composition of that subset changed throughout the course of the program.
Abstract
We utilize Dun & Bradstreet data on firms’ financial condition to examine the allocation of Paycheck Protection Program (PPP) loans and their impact. Three main findings emerge. First, firms in better financial condition prior to the COVID outbreak were advantaged in the allocation of PPP loans. Second, firms’ financial condition improved significantly and persistently after receiving a loan, and this effect was more pronounced among the smaller and less financially sound firms. Third, we demonstrate empirically that the heterogeneity in firms’ financial condition must be accounted for to correctly identify and estimate the overall effect of the PPP.