Title: Do credit constraints matter more for college dropout entrepreneurs?

Authors: Arndt Werner

Addresses: Institute for Small and Medium Size Enterprises, Bonn (IfM Bonn), Maximilianstr. 20, 53111 Bonn, Germany

Abstract: The purpose of this study is to shed some light on the relationship between the educational background of entrepreneurs and their ability to get financial resources from banks. Start-ups and their potential lenders are faced with severe problems of asymmetric information regarding the evaluation of entrepreneurial capabilities due to the lack of a production history and reputation. To reduce the informational gap, banks could be expected to use college graduation experience as an observable signal for the underlying quality of the new firm when deciding to grant a credit to a founder. We empirically test our hypothesis, using a dataset of 189 German start-ups. Our hypothesis is borne out by the data. Under the control of various individual characteristics, we find college dropouts have more difficulties to obtain credit in the start-up phase than founders who did not drop out of college.

Keywords: adverse selection; financial constraints; higher education; college dropouts; universities; colleges; credit constraints; entrepreneurs; educational backgrounds; financial resources; banks; start-ups; potential lenders; asymmetric information; capability evaluation; entrepreneurial capabilities; production histories; company reputations; informational gaps; college graduations; graduation experience; observable signals; underlying qualities; new firms; business founders; Germany; entrepreneurship; innovation management; entrepreneurial finance.

DOI: 10.1504/IJEIM.2011.041731

International Journal of Entrepreneurship and Innovation Management, 2011 Vol.14 No.2/3, pp.190 - 205

Published online: 30 Sep 2014 *

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