Credit constraints under endogenous participation decisions: evidence from European firms

Purpose This paper examines financing constraints among European firms by distinguishing between firms that obtain external finance, firms that refrain from applying because they expect rejection, and firms whose applications are rejected. It investigates whether financial vulnerability, profitability, financing gaps, and firm size are associated differently with these financing states. By incorporating firms that self-select out of the application process, the study provides a broader assessment of financing constraints than approaches based exclusively on observed credit rejection. Design/methodology/approach The analysis uses 114,924 firm-wave observations from the Survey on the Access to Finance of Enterprises (SAFE). Financing outcomes are modelled using a multinomial logit framework distinguishing successful financing, discouragement due to expected rejection, and outright rejection. Standard errors are clustered at the firm level. Robustness analyses include country and survey-wave fixed effects, macroeconomic controls, alternative definitions of adverse applicant outcomes, mixed financing cases, and separate binary logit models. Findings Financial vulnerability is strongly associated with both discouragement and outright rejection, while profitability is associated with a lower relative likelihood of discouragement but not with strict rejection. A positive financing gap is strongly associated with both adverse outcomes, with the largest relative effect observed for rejection. Firm size displays a pronounced gradient: relative to micro firms, larger firms are substantially less likely to experience either discouragement or rejection. The results remain stable across multiple robustness specifications. Originality/value This study contributes to the financing-constraints literature by jointly examining successful financing, borrower discouragement, and outright rejection within a common empirical framework. Unlike approaches based exclusively on observed credit applications, it explicitly incorporates firms that self-select out of the application process because they anticipate rejection. This distinction allows financing constraints arising before formal application to be compared with those observed after lender screening. The study also provides new evidence on how financial vulnerability, profitability, financing gaps, and firm size are differently associated with these two adverse financing states.