Abstract

http://ssrn.com/abstract=1309581
 
 

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Do Credit Constraints Matter More for College Dropout Entrepreneurs?


Arndt Werner


Institute for Small and Medium Sized Enterprises, Bonn (IfM Bonn)

December 1, 2008


Abstract:     
Start-ups and their respective market partners are faced with severe problems of asymmetric information due to their lack of prior production history and reputation. Given this situation, it is most likely that outside financiers will not be informed about the potential gains, losses, and risks of the new venture. In our paper, we study how banks screen the abilities of the entrepreneurs. We argue that specific characteristics of the educational history of individuals signal their quality as founders. Namely, we expect banks to also use "college dropout" as an indicator when deciding to extend credit to a founder. We empirically test our hypotheses using a dataset of 189 German start-ups collected in 1998/99. Our hypothesis is borne out by the data. Applying ordered probit techniques we find that college dropouts have more difficulties to obtain the credit they need in the beginning of their start-up than those without college dropout experience.

Number of Pages in PDF File: 17

Keywords: adverse selection, financial constraints, entrepreneurship, education

JEL Classification: M13, M5, D82, M21

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Date posted: December 2, 2008  

Suggested Citation

Werner, Arndt, Do Credit Constraints Matter More for College Dropout Entrepreneurs? (December 1, 2008). Available at SSRN: http://ssrn.com/abstract=1309581 or http://dx.doi.org/10.2139/ssrn.1309581

Contact Information

Arndt Werner (Contact Author)
Institute for Small and Medium Sized Enterprises, Bonn (IfM Bonn) ( email )
Maximilianstra9e 20
53111 Bonn
Germany
+ 49 228 72997 44 (Phone)
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