The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers

53 Pages Posted: 5 Nov 2014 Last revised: 31 Oct 2019

See all articles by Annalisa Ferrando

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

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Date Written: June 1, 2017

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

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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