Does public funding reduce financial constraints of young firms in Germany?Does public funding reduce financial constraints of young…N. Weuschek

This paper examines the financing situation of young firms in Germany after receiving public funding. I find that, on average, public funding is associated with a significant reduction in the future probability of experiencing financial constraints. While grant tend to improve relationships with equity investors, subsidized loans or loan guarantees tend to improve relationships with external providers of both equity and debt capital. Additionally, I show that the effect of public funding is stronger for more financially constrained firms when provided as a subsidized loan or loan guarantee, and heterogeneous across entrepreneurs and startups. Furthermore, my results suggest that public funding is positively related to real outcomes, and that grants also help firms by stabilizing their economic position.