We study how late payment in public procurement affects corporate policies by analyzing a public program that unexpectedly repaid local government arrears. Our identification strategy compares firms included in the program with similar firms that were accidentally excluded. Early repayment of arrears leads to real effects and heterogeneous corporate responses. Financially unconstrained firms repay financial debt and accumulate cash, while constrained firms repay suppliers, build cash, and increase investment. This suggests that financially constrained firms can only partially offset the liquidity cost of arrears, while unconstrained firms, with better access to bank credit, fully accommodate them. The accumulation of arrears also deteriorates procurement relationships, which do not recover after repayment.
