The Effects of Borrowers’ Discouragement, Perceptive Discrimination and Risk-taking on Entrepreneurs’ Preferences for External Financing

Abstract

This paper examines the impacts of borrowers’ discouragement, self-perceived discrimination to apply for bank financing and appetite for risk-taking on preferences for external financing amongst ethnic minority businesses (EMBs) in the UK. Our results suggest three main reasons for borrower discouragement to apply for bank financing, namely financing cost, financing history and fear of prejudice. We find that borrowers’ discouragement and self-perceived discrimination significantly impact preferences for external financing. Specifically, EMBs prefer more asset financing if they are discouraged due to financing cost, whilst less asset financing if they are discouraged due to fear of prejudice. However, there is no significant impact of discouragement or self-perceived discrimination on the preference for bank financing. Entrepreneurial risk-taking explained little variation in EMBs’ preferences for external financing.

Keywords: discouraged borrowers, perceptive discrimination, risk preference, ethnic minority businesses (EMBs), external finance

JEL Classification: G02