Quality of year-end spending and risk–return trade-off

Abstract

This paper examines how the quality of government spending changes at the end of the fiscal year, using administrative data from financing programmes for small and medium-sized enterprises in South Korea. We assess spending quality based on the average sales growth of recipient firms. We show that while an early budget execution policy reduces year-end volume spikes, the quality of spending still drops significantly at fiscal deadlines. Both theoretical and empirical results demonstrate that financing agencies shift towards lower-risk investments at the end of the fiscal year, leading to lower returns even in the absence of spending surges.