The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers

53 Pages Posted: 5 Nov 2014 Last revised: 1 Mar 2022

See all articles by Annalisa Ferrando

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

Abstract

This paper analyzes the characteristics and behavior of discouraged borrowers. First, we show that, in the decision to apply for a bank loan or to be discouraged, firms trade-off their expected return on investment with the cost of borrowing (interest rate, opportunity cost, application cost) and their rejection likelihood. Second, we predict the approval likelihood of discouraged borrowers and find that a significant fraction would be able to get a bank loan if they would actually apply. Third, we exploit an exogenous legal change in Belgium that reduced firms' loan application costs and find that this significantly reduced the probability of being discouraged for firms in Belgium relative to similar firms in Germany and France. Using this exogenous change in discouragement, we document strong negative effects of discouragement on investment, employment, and sales.

Keywords: Discouraged borrowers, determinants, real effects, natural experiment

JEL Classification: G01, G10, G30, G32

Suggested Citation

Ferrando, Annalisa and Mulier, Klaas, The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2518980 or http://dx.doi.org/10.2139/ssrn.2518980

Annalisa Ferrando

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Klaas Mulier (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

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