Discouraged borrowers: Evidence for Eurozone SMEs

This study examines the decision by firm owners not to apply for intermediated debt due to a perception that their application will be rejected for a sample of small firms in 9 European countries. Compared with firms that applied for bank loans, discouraged borrowers are smaller, younger, have declining turnover and an increasing debt to assets ratio. Transmission of macro effects through the banking system and the economic environment also leads to higher levels of discouragement. Higher regulatory quality results in greater borrower discouragement, indicating the importance of regulation and enforcement mechanisms for the efficient functioning of private debt markets.