Loan availability and investment: Can innovative companies better cope with loan denials?

This study examines the consequences of loan denials for the investment performance of small and medium-sized German enterprises. As a consequence of a loan denial, innovative companies experience a smaller drop in the share of actual to planned investment than non-innovative companies. The non-randomness of loan denials is controlled for with a selection equation employing the intensity of banking competition at the district level as an exclusion restriction. We can explain the better performance of innovative companies by their ability to increase the use of external equity financing, such as venture capital or mezzanine capital, when facing a loan denial.