distortions tend to be stronger on capital distortions for smaller firms in our sample. For larger firms there is no significant effect of financial dependency on output distortions at standard confidence levels (line (c)). This is in line with previous results suggesting that for large firms BNDES credit does not significantly influence firm outcomes, including investment (e.g. Lazzarini et al. 2015).

**Table 3 – Financial Dependency and BNDES Credit on Distortions: Subsample analysis**

|||(3)|(4)|(5)|(6)|(7)|(8)|
|---|---|---|---|---|---|---|---|
|||ln(1|- tyit)|ln(1|+ tkit)|<br>Everuse|<br>dBNDES|
||VARIABLES|Large|Small|Large|Small|ln(1 - tyit)|ln(1 + tkit)|
|(a)|BNDES Creditit|0.0235***<br>(0.00842)|0.0176***<br>(0.00500)|-0.0205<br>(0.0127)|-0.0356***<br>(0.00503)|-0.00852<br>(0.00708)|-0.0297***<br>(0.00770)|
|(b)|BNDES Cred * Fin.Depit|-0.0150**<br>(0.00651)|0.00206<br>(0.00374)|0.000474<br>(0.00983)|-0.0108***<br>(0.00376)|0.00896<br>(0.00610)|-0.00509<br>(0.00662)|
|(c)|Financial Depit|-0.00412<br>(0.00399)|-0.0433*** <br>(0.00203)|0.130***<br>(0.00602)|0.129***<br>(0.00204)|-0.0516*** <br>(0.00470)|0.123***<br>(0.00511)|
||Observations|9,790|94,302|9,790|94,302|20,892|20,892|
||Number of ii|3,003|34,743|3,003|34,743|10,312|10,312|
||R-squared|0.377|0.115|0.173|0.108|0.097|0.140|
||BNDES Cred. Contrib to Var|-0.02%|-0.15%|0.31%|0.07%|-0.23%|-0.14%|
||Median Fin Dep.|0.219|0.161|0.219|0.161|0.273|0.273|
||BNDES Credit Eff.|0.0202|0.0179|-0.0204|-0.0374|-0.0061|-0.0311|
||p-value|0.011|0.000|0.088|0.000|0.342|0.000|

Note: authors ́ calculation based on raw IBGE manufacturing data, 2003-2014. BNDES credit is a dummy which takes value 1 if firm _i_ used BNDES/FINAME credit in year _t_ and zero otherwise; Financial Dep equals investment outlays / cash flow, where cash flow is value added minus wage bill; Firm and Year dummies included; lagged log revenue and log value added included as controls. BNDES Cred. Contrib. is the proportion of the variance of the dependent variable explained by BNDES Credit variables, following eq. (7). BNDES Credit Eff. is BNDES credit effect on distortion evaluated for the median firm, i.e., BNDES Credit coefficient plus the interaction coefficient times Median Financial Dependency; P-value is a significance test p-value of BNDES Credit Eff. Standard errors given in parentheses: *** p<0.01, ** p<0.05, * p<0.1.

As a robustness estimate, we restrict the sample to firms that ever used BNDES credit over the sample period. Even if BNDES credit is relatively cheap, no more than 20 percent of firms in our sample used such credit. These firms may differ significantly from other firms, violating identification hypotheses for our differences-in-differences estimates. Therefore, in columns (7)-(8) we use as control group firms that have not used credit in the same year as the treated firms. Our main results for the negative effect of BNDES credit on capital distortions and marginal revenue product of capital are confirmed. Yet the contribution of BNDES credit on distortions variance is now negative. This suggests that for the specific group of firms that do use BNDES credit such credit use reduces heterogeneity. When empirically evaluated, the opposing effects of external financial dependency and BNDES credit on distortions point to the dominance of the BNDES credit effect for the median financially dependent firm. The inverse relationship between BNDES credit and these distortion effects yields a negative contribution on aggregate productivity, as in the Hsieh and Klenow (2009) analytical framework.

16