The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers

54 Pages Posted: 5 Nov 2014 Last revised: 16 Jun 2017

See all articles by Annalisa Ferrando

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University-Universiteit Gent - Faculty of Economics and Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

We use a new survey-based data set of 7,345 firms in 9 euro area countries over the period 2005-2015 to analyse the characteristics and behaviour of discouraged borrowers. We find that i) in their discouragement decision, firms trade-off their expected return on investment with the effective cost of borrowing (interest rate, opportunity costs, application costs) given their likelihood of rejection (firm risk). Firm risk matters significantly less when banks make more screening errors. ii) We predict the approval likelihood of discouraged firms and find considerable heterogeneity. iii) Comparing discouraged firms to applying firms of the same approval likelihood, we find strong negative effects of discouragement on investment (-11pp), employment (-4pp), added value (-5pp) and total assets (-6pp) growth due to the lack of bank financing. iv) Finally, we exploit a legal change in Belgium that reduced the application costs for firms. We find that the probability of being discouraged nearly halved for firms in Belgium after the introduction of the law compared to similar firms in other countries.

Keywords: Discouraged borrowers, survey data, 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 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-Universiteit Gent - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

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