The purpose of this paper is to investigate the trend of discouragement in the small and medium sized enterprise’s (SME) lending market during the aftermath of the financial crisis of 2008. It detects the extent to which the responses of discouraged firms to improvements in the lending market are lagged.
The results are based on surveys of UK SME Finance Monitor (2011-2016). Probit regression models were used to assess the effect of time passed from the financial crisis on the probability of discouragement.
The analysis, inter alia, shows that the rate of discouragement has reduced significantly since 2013. The results highlight the long-term effect of tightened credit supply on SMEs that are ready to invest, but hold back because of fear of rejection.
The research suggests addressing imperfect information among discouraged SMEs that are recuperating from the financial crisis. With the rise of information asymmetry, entrepreneurs show a higher level of fear of rejection by financial institutions. The longer the effects of the financial crisis exists among entrepreneurs, the longer they self-ration from credit market, which subsequently leads to reduced levels of investment, growth, and innovation among SMEs.
This research fills a gap in the literature of the effect of financial crisis on the latent demand for lending. It discusses the long-term effect of tightened credit supply among entrepreneurs even though the supply side has recuperated and recommenced pre-crisis activities.
The author would like to thank anonymous reviewers and Dr Mark Freel for their constructive feedback. All remaining errors are the authors.
Rostamkalaei, A. (2017), "Discouraged borrowers aftermath of financial crisis: a UK study", Journal of Small Business and Enterprise Development, Vol. 24 No. 2, pp. 394-410. https://doi.org/10.1108/JSBED-09-2016-0137
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