The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers

Abstract

This paper analyses the characteristics and behavior of discouraged borrowers. First, we show that in their discouragement decision, firms trade off their expected return on investment with all borrowing related costs 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 loan if they would apply. Third, we exploit an exogenous legal change in Belgium that reduces firms' loan application costs and find that this significantly reduces 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