Financial knowledge and borrower discouragement

TL;DR

This paper empirically examines how entrepreneurs' financial knowledge influences borrower discouragement, revealing that lower financial literacy leads to higher discouragement and highlighting the potential for financial knowledge to improve credit market efficiency.

Contribution

It provides the first empirical evidence linking financial knowledge to borrower discouragement among micro-entrepreneurs, emphasizing its role in reducing credit market imperfections.

Findings

Less financially knowledgeable entrepreneurs are more discouraged from applying for financing.

Financial knowledge reduces perceived application costs and rejection expectations.

Self-rationing due to lack of financial knowledge is inefficient.

Abstract

This study provides first empirical evidence on the impact of entrepreneurs' financial knowledge on borrower discouragement. Using novel survey data on Italian micro-enterprises, we find that less financially knowledgeable entrepreneurs are more likely to be discouraged from applying for new financing, due to higher application costs and expected rejection. Our main results are robust to several sensitivity checks, including accounting for potential endogeneity. Furthermore, we show that the observed self-rationing mechanism is rather inefficient, suggesting that financial knowledge might play a key role in reducing credit market imperfections.