Scared away? Discouraged borrowers and Capital market information

We do the first study on discouraged borrowers in Denmark to firstly investigate the extent of this phenome-non in Denmark. Secondly, we test if characteristics of firms (age, size, innovativeness, industry) impact their likelihood of being discouraged from entering the capital markets. Thirdly, and most importantly, we test if the self-perception of firms regarding their near-future development is a stronger predictor of discouragement than objective firm characteristics.
Prior Work;
Earlier studies call for more empirical work on the extent and scale of discouraged borrowers, especially in Western European countries outside the UK and US. They also urge research to identify characteristics of discouraged borrowers. Compared to earlier studies, we include variables related to the expectations and development of individual firms.
Approach;
We analyze data from two waves of surveys conducted in 2012 and 2013, making up 692 observations of 358 unique firms. We also include in our two-stage model factors influencing the general demand for external finance.
Results
We find that the general level of discouraged borrowers in Denmark is comparable to other European coun-tries, although slightly above these. Firm characteristics do not show out strongly in our results. Firms who are in a bad development are more likely to not enter the application process of fear of rejection. Firms who believe in positive long term prospects of the firm are less discouraged to apply for finance. We find that the self-perception of firms is a stronger predictor of discouragement than firm characteristics. The phenomenon essentially involves decisions on a micro-level of aggregation but also shared beliefs and standards. This brings us to elaborate on the need for adding behavioral aspects to an adequate theory of discouraged borrowers.
Implications
Implications entail missed opportunities for firms, which in turn is likely to have deterrent effects on overall investments and economic growth. Financial institutions will miss out on business opportunities but will also have difficulties in fine-tuning their credit assessment tools when all demand is not surfaced. Policy implica-tions are that supply side initiatives should be supplemented with new types of demand side initiatives. Man-agement implications are that firms should reveal information on assessment criteria of banks before the articulation of demands.
Value
We contribute to a better understanding of the demand side of financing of entrepreneurship and innovation. The study is valuable in pointing to the importance of behavioral factors in the further development of the research in this area.