Do Credit Constraints Matter more for College Dropout Entrepreneurs?

Werner, Arndt (2008): Do Credit Constraints Matter more for College Dropout Entrepreneurs?

Abstract

Start-ups and their respective market partners are faced with severe problems of asymmetric information due to their lack of prior production history and reputation. Given this situation, it is most likely that outside financiers will not be informed about the potential gains, losses, and risks of the new venture. In our paper, we study how banks screen the abilities of the entrepreneurs. We argue that specific characteristics of the educational history of individuals signal their quality as founders. Namely, we expect banks to also use “college dropout” as an indicator when deciding to extend credit to a founder. We empirically test our hypotheses using a dataset of 189 German start-ups collected in 1998/99. Our hypothesis is borne out by the data. Applying ordered probit techniques we find that college dropouts have more difficulties to obtain the credit they need in the beginning of their start-up than those without college dropout experience.

• Item Type: MPRA Paper
• Language: English
• Keywords: adverse selection, financial constraints, entrepreneurship, education
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

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