Collateral requirements, cost of credit, and firms' discouragement from applying for bank loans

P. Arca (), Luca Deidda and Gianfranco Atzeni

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: Using the BEEPS dataset on Eastern European and Central Asian firms, we investigate how the collateral requirements and the cost of credit expected by firms might discourage them from applying for credit. Based on the data we identify four reported discouragement reasons - (A) high probability of rejection, (B) high cost of credit, (C) high cost of application, (D) and other reasons. We develop a simple statistical model to derive the following set of predictions about the impact of expected collateral requirements and cost of credit on discouragement. First, collateral requirements and cost of credit should induce discouragement across all reported reasons. Second, higher expected collateral requirements and cost of credit should have a lower effect when the reported reason is (A). If the firm already fears rejection, a higher collateral requirement or a higher cost of credit should play little role. Third, collateral requirements should have a larger impact when the reported reason is (B). If the firm is discouraged by the high cost of credit rather than the fear of rejection, an increase in the expected collateral requirements becomes more significant as it may add the risk of rejection as an additional concern for the firm. We test these predictions using a multinomial logit model and we find robust evidence that supports all of them.

Keywords: Credit rationing; multinomial logit; loans to collateral value; discouraged; denied; cost of application (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://crenos.unica.it/crenos/node/8919
https://crenos.unica.it/crenos/sites/default/files/wp-24-17.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202417

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS ().