To determine whether firms are credit constrained we analyze how they react to the availability of capital grants: constrained firms will use grants to expand investment, while unconstrained firms will use them as a substitute for other borrowing. This idea is applied to a sample of Italian firms that requested the financial assistance provided by an investment incentives program. By comparing the investment and debt performances of subsidized firms with that of firms whose applications were rejected, we show that there is only weak evidence of limits to borrowing.

To determine whether firms are credit constrained w analyze how they react to the availability of cap ital grants: constrained firms will use grants to expand investment, while unconstrained firms will use the m as a substitute for other borrowing. This idea is applie d to a sample of Italian firms that requested the f inancial assistance provided by an investment incentives pro gram. By comparing the investment and debt performances of subsidized firms with that of firms whose applications were rejected, we show that the re is only weak evidence of limits to borrowing. JEL Classification: G20 and O16