As the COVID-19 pandemic continues to alter the business landscape, scholars are attempting to map out its consequences. New research by SMU Cox finance professor Anna Cororaton and Samuel Rosen of Temple University sheds light on which public firms applied for and received stimulus funds, in one of the first empirical studies of the unprecedented fiscal programs to help keep American businesses afloat during the pandemic.
A key component of the Coronavirus Aid, Relief, and Economic Security Act is the Paycheck Protection Program (PPP), a $659 billion fund designed to help keep workers employed thanks to forgivable business loans. The first round of funds totaled $349 billion, with a follow-up round of $310 in late April after funds were dispersed and businesses’ needs remained. The program, executed by the Small Business Administration (SBA), is considered one of the largest U.S. stimulus programs in history.
Who Got Funds?
Initially, media attention focused on a few large public firms, such as Shake Shack and Ruth’s Chris, that received funds only to return them after public outcry. However, according to Cororaton, “Public firms receiving PPP funds were a small fraction of the program’s recipients; this surprised us at first given the media attention on public firms.” Cororaton and her coauthor wanted to investigate who the public firms were that received the PPP funds and if they were eligible according to the PPP criteria. They studied the 424 public firms that received a total of $1.4 billion in loans from April 7 to July 15.
Their study’s results suggest that within the set of public firms, those that received loans were more directly affected by the pandemic, resulting in more need for economic relief funding from the government.
Businesses with fewer than 500 employees could apply for PPP loans. Hotels and food services firms were eligible if a location had fewer than 500 employees. The authors estimated that around 6 million firms were eligible for PPP loans. The program’s average loan amount per employee for public firms was $18,677, and roughly $8,000 less for both private and public firms combined. The average size of loans to public firms was nearly $3.28 million, versus $106,000 for private firms.
After scanning Securities Exchange Commission (SEC) filings to generate a list of all public firm PPP borrowers, Cororaton and Rosen found that close to half of all public companies were eligible to apply for PPP funds, and of those companies, 22% received funds. The public companies that received funding were smaller but tended to have more employees. These public firms also had fewer investment or growth opportunities, with debt on their balance sheet already, and were more often located within counties that had more COVID-19 cases.
Better Targeting Needed
Did the policy work? “It’s still too early to tell, but what we can see is that these public firms fit the eligibility criteria,” Cororaton says. “If policymakers wanted to improve the program, they would need to target it better. The program needs more specific criteria to determine which firms need the funds the most.”
Cororaton suggests that in the follow-up round of April 24, the SBA did become more strict and tightened eligibility requirements. Public corporations were limited to $20 million, and public pressure inhibited a number of public firms from applying if they didn’t need to. Additional targeting may be in the works with another round of PPP funds expected as legislators debate another stimulus round in early August.
The authors looked at where the funds were dispersed across the country. Based on their geographic analysis of the first round of the program, they found that there was high uptake in New Mexico and Vermont. Some less-populous states, such as North and South Dakota and Mississippi, had very high rates of loan uptake. Of small firms in California, 15% received loans versus 58% in North Dakota. The authors suggest some reallocation of resources geographically could have helped with targeting funds.
“More-populous areas along the coasts such as California and New York had lower fractions of small businesses receiving funds,” Cororaton notes. It’s possible that targeting was not the only problem, and that it was also a lack of manpower to process loans, she adds. When firms had previous relationships with banks, they might have been able to access funds more easily. A goal would be to allocate resources where there are more borrowers that need the funds, according to Cororaton.
Cororaton and Rosen plan to assess whether the program accomplished its mission when data on firm outcomes become available. More time is needed to judge how the program came through for American businesses and their employees.
“We are waiting on the results from these public firms to see if they retained the number of employees and what happened with access to capital markets,” Cororaton says. She and Rosen will wait to capture more data that reveal the program’s economic impact.
“Public Firm Borrowers of the U.S. Paycheck Protection Program” is authored by Anna Cororaton, assistant finance professor at SMU Cox School of Business, and Samuel Rosen, assistant finance professor at Fox School of Business, Temple University.
Written by Jennifer Warren.