Strategically Small Firms and the Real Effects of Public Grants in a Crisis

The aim of the Essex Accounting Centre (EAC) research seminar series is to support our world-class research activities in five key areas: accounting and global development; capital Markets, audit, regulation & reporting; publicness and resilience, precarity, exclusion & social justice; and environment, climate change & vulnerability. The seminar series is also expected to promote interdisciplinary research that links the work of members of the centre with others both within the university and with external institutions.

We investigate whether strategically small firms that avoid surpassing size-dependent regulations in non-crisis periods may have benefited more from public resources during the COVID-19 crisis.

We define as strategically small the firms positioning themselves below two thresholds: (i) Euro 6 million revenues, implying less stringent tax and its oversight, or (ii) 50 employees, benefiting from looser labour laws and lower disclosure requirements. We first document systematic firms’ bunching below the revenues and employee thresholds, suggesting that these regulations may discourage firm growth. We do not observe similar behaviours at other disclosure and auditing thresholds.

We then show that these firms were more likely to obtain public funding during the crisis, relative to firms just above the thresholds. Despite accessing more public resources, strategically small firms exhibit similar or lower growth and performance than their counterparts during and after the crisis.

Overall, we document that size-dependent regulations affect firms’ behaviour in good times and have unintended effects on public resource allocation in crisis times.