Once upon a loan: How folk tales shape access to credit

We investigate the effect of folklore on firms’ access to credit. Using firm-level data on a large sample of 38,000 firms covering 124 countries and 274 cultural societies over the 2005–2022 period, we test the hypothesis that oral traditions linking risk-taking to success or failure influence access to credit. We find that folklore affects access to credit. Oral traditions associated with successful challenges increase access to credit, while those associated with unsuccessful challenges decrease access to credit. We further show that folklore influences access to credit through borrower discouragement and loan approval. We also find that foreign-owned firms are less sensitive to the influence of folklore, while more developed legal institutions reinforce its impact. We further observe that folklore explains aggregate credit supply at the country level. Using representations of trust in folklore, we find that more trusting societies are associated with more loan approval but lower loan applications, which results from the fact that higher trust encourages informal credit.