Entrepreneurial Optimism, Credit Availability, and Cost of Financing: Evidence from U.S. Small Businesses

Abstract

Does entrepreneurial optimism affect the financing decisions? Do financiers have better knowledge of entrepreneurs’ unrealistic optimism and curtail lending to them? Using a large sample of U.S. small businesses and a new measure of optimism, we find that more optimistic entrepreneurs tend to use more short-term debt. We do not find evidence that banks curtail lending to more optimistic entrepreneurs. In fact, banks are more likely to approve loan applications by optimistic entrepreneurs, they do not charge an interest premium, and do not require more collateral. Our results are robust to alternative measures of optimism, alternative samples, and controls for private information.