Abstract:
This paper investigates the dilemma of growth in which the expectation of high growth is the source of discouragement among borrowers. Using the panel probit model on a cross-country panel of firms studies in waves of the Survey on Access to Finance of Enterprises, we do not find any evidence that high-growth firms can be considered discouraged borrowers. However, firms that expect to grow rapidly in the future are discouraged from borrowing because those that are growth oriented understand the uncertainty of their growth plans and do not want to send negative signals to stakeholders if their loan applications are scaled back or rejected. This applies to all forms of financing and includes both first-time rapidly growing aspirants and enterprises looking for their next spurt of high growth. Finally, improvement in credit relationships with banks reduces information asymmetry and increases the frequency of interaction between banks and firms planning for high growth. Therefore, better banking relationships increase the borrowing discouragement of firms planning for high growth. The paper proposes that growth expectation (not necessarily high-growth performance) is an underexplored source of financial constraints. This distinction introduces a new theoretical perspective: the expectation of growth, rather than its realization, play a critical role in discouragement behavior. Policy makers and financial institutions should design tailored financial instruments for high-growth aspirants.