Small firms, corruption, and demand for credit. Evidence from the Euro area

In this paper, we aim to assess how the quality of the institutional environment – identified according the level of corruption perceived in a country – may affect the access to credit for micro, small, and medium-sized enterprises (MSMEs). Based on a sample of 68,115 observations – drawn from the ECB-SAFE survey – related to MSMEs chartered in 11 euro area countries, during the period 2009–2014, we investigate whether the level of corruption affects their demand for bank loans. Overall, we find that the degree of corruption seems to play a role in the applications for bank loans when small firms are under investigation. Interestingly, results highlight that small businesses chartered in highly corrupt countries face a greater probability of self-restraint regarding their loan applications (about 7.4%) than small firms located in low-corruption economies (around 6%). The results are robust to various model specifications and econometric methodologies. Our findings suggest that anti-corruption policies and measures enhancing transparency in the economy may be crucial in reducing the negative spillovers generated by a low-quality institutional environment on the access to credit by small firms.