The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers
53 Pages Posted: 5 Nov 2014 Last revised: 1 Mar 2022
There are 2 versions of this paper
The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers
The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers in the Euro Area
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: Suggested Citation