Int Entrep Manag J DOI 10.1007/s11365-014-0300-0
Giving second chances: the impact of personal attitudes of bankers on their willingness to provide credit to renascent entrepreneurs Ingrid Wakkee & Ed Sleebos
# Springer Science+Business Media New York 2014
Abstract Following recent public and scientific discussions on credit provision for entrepreneurs and credit management policies of banks, this study’s objective is to examine the effect of personal attitudes of bankers on their willingness to consider credit applications from renascent entrepreneurs. Previously, applications from renascent entrepreneurs were automatically rejected. Recently, more and more banks leave the evaluation of these applications to the bankers themselves. In the current study (n= 608) we use an attitudinal perspective to suggest how bankers’ entrepreneurial attitudes, their commitment to credit applications, their perceptions of bankruptcy (in terms of stigmatization and learning opportunities), and their past experience with credit provision to renascent entrepreneurs, influence their willingness to consider new credit applications from renascent entrepreneurs. Overall, results show that individual bankers extensively determine renascent entrepreneurs’ access to financial capital. Implications for banks’ credit provision policy toward renascent entrepreneurs, and for theory, and suggestions for future research are provided in the conclusion and discussion. Keywords Entrepreneurship . Finance . Bankruptcy . Bankers . Attitudes . Credit application . Failure and recovery . Experience . Survey
Introduction The evaluation of credit risks has become an important topic within the banking literature (Abdou et al. 2008; Banasik et al. 2001; Thomas et al. 2002). For the majority of entrepreneurs, bankruptcy means the end of their career as an entrepreneur (Armour and Cumming 2008; Landier 2002; Simmons and Wiklund 2011). Although there are many reasons for this high dropout rate, one of the most important ones is the reluctance of bankers I. Wakkee (*) : E. Sleebos Department of Organization Sciences, Faculty of Social Sciences, VU University, De Boelelaan 1081, 1081 HV Amsterdam, The Netherlands e-mail:
[email protected] E. Sleebos e-mail:
[email protected]
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to provide credit to entrepreneurs who have been involved in a bankruptcy in the past but who are engaging in renewed entrepreneurial activities (hereafter called renascent entrepreneurs; (European_Commission 1998; Folkeringa and Vroonhof 2004; Landier 2002). In most European countries—including the Netherlands, where we conducted this study—there are no legal barriers for entrepreneurs who have been involved in a bankruptcy in the past, unless they are charged for gross misconduct or fraud (European_Commission 2007). Nevertheless, until 2000 most banks operating in the Netherlands automatically rejected credit applications from these renascent entrepreneurs without considering their potential. A bankruptcy involvement on an entrepreneur’s resume was sufficient to discount his/her application, irrespective of whether the entrepreneur was a new customer to the bank (and consequently had no credit history there) or was an existing customer who had either repaid or settled previous debts at an earlier stage. The reason for this was that previous bankruptcies were seen as a sign of inadequacy or potential misconduct on the part of the entrepreneur, and thus constituted a risk factor. This reluctance may seem understandable from a risk management perspective, but actually proved to be a fruitless strategy for banks. Notably, empirical evidence showed that about five percent of all entrepreneurs were involved in a bankruptcy at some stage of their career (Stam et al. 2005). Nevertheless, the survival rates of renascent entrepreneurs are considerably higher compared to novice (start-up) entrepreneurs (Metzger and Niefert 2006; Timmons et al. 1999), while their overall performance seems comparable to the general population of entrepreneurs (Wakkee 2013). Recognizing these findings, many banks have in the last decade started to change their policies towards renascent entrepreneurs (Rehoorn 2006). Due to this shift in policy, credit applications from renascent entrepreneurs (without unsettled debts) are no longer automatically rejected by these banks, but rather assigned to the personal responsibility of bankers. As a result of these changes, it has become particularly relevant to examine bankers’ individual differences that affect the extent to which these bankers are willing to provide credit to these entrepreneurs, and/or whether they continue to dismiss such applications without giving them serious consideration. By exploring this issue from an attitudinal perspective (Barberis and Thaler 2005)) this study contributes both to the credit application management literature and the entrepreneurship literature. Traditionally, research has focused on credit scoring based on mathematical models (Berger and Frame 2007; Frame et al. 2001), and on relationship lending based on soft information about the entrepreneur which is gathered through direct personal interactions between the banker, the entrepreneur and the community in which they operate (Degryse and Van Cayseele 2000). By shifting the focus towards the attitudinal and behavioral characteristics of those who actually evaluate the application, this study fills a novel and serious gap in the credit application management literature. The individual differences between bankers have often been neglected in favor of more traditional frameworks that suggest that bankers are rational actors following standardized procedures and mathematical guidelines, and this may have led to incomplete models of credit management (Barberis and Thaler 2005). Given that it is well documented in the literature that personal attributes and orientations have a strong influence on the intentions and behavior of individuals (Fishbein and Ajzen 1975; Krueger et al. 2000), the current research focuses particularly on the effects of the personal attitudes of bankers on their willingness to provide credit to renascent entrepreneurs. We perceive bankers’ willingness to provide credit to
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renascent entrepreneurs as a key factor in the credit assignment process. If bankers are not willing to consider credit applications from renascent entrepreneurs, it is irrelevant which tools and procedures banks have instigated to manage credit applications. Nevertheless, it is important to keep in mind that bankers’ willingness to consider an application will not automatically lead to approval of that application, regardless of the previous track record of the entrepreneurs. Our study also widens the ongoing debate on opportunities for renascent entrepreneurship (Stam et al. 2005). When it comes to the study of renascent entrepreneurs, most attention so far has been devoted to grief recovery and learning from failure (Shepherd 2003; Shepherd et al. 2009), the legal aspects of bankruptcy settlement (Fan and White 2003), the comparison of (demographic) characteristics between renascent entrepreneurs and those who give up after bankruptcy (Metzger and Niefert 2006; Stam et al. 2005), and the effect of stigmatization (Landier 2002). While acknowledging the importance of these studies hitherto, we argue that the lack of insight into bankers’ decision-making processes to provide credit to renascent entrepreneurs is an omission (Åstebro and Bernhardt 2003; Grunert and Norden 2011; Irwin and Scott 2010). If bankers are unwilling to even consider their credit applications, starting a new firm will be very difficult. Therefore, gaining insight into the factors that explain why some bankers are more willing than others to consider credit applications from renascent entrepreneurs enhances our understanding of credit provision for renascent entrepreneurs when they attempt to start up a new venture. The paper is organized in the following manner. First we present our arguments regarding the effect of five relevant attitudes of bankers that affect their willingness to provide credit to renascent entrepreneurs, upon which we develop our hypotheses. In particular, we focus on entrepreneurial attitudes, bankers’ commitment to credit applications, stigma perceptions and learning perspective—which are more specifically related to ideas about failure and second chances. Next, we describe the design used in the study to test the hypotheses, and our sample of 608 bankers working for a large Fortune 100 bank in the Netherlands. We then report the results of our analyses. Finally, we discuss the scientific and empirical implications of our study, as well as its limitations and the avenues for further research in this area.
Individual differences in credit application Banks and bankers play a key role in determining who is entitled to loans or credit for starting a (new) business and who is not (Abdou et al. 2008). In our view, this makes bankers some of the most important social and economic arbiters of entrepreneurship in society when it comes to deciding on whether renascent entrepreneurs deserve a second chance, in addition to members of the press, government officials and academics who were previouslt identified as such in a study by Wiesenfeld et al. (2008), when it comes to deciding whether renascent entrepreneurs deserve a second chance. Although banks formulate strict procedures and guidelines to formalize the credit application process, and specialized risk managers ensure that credits approved by bankers do not exceed certain corporate risk-levels, individual bankers typically have significant levels of freedom in evaluating credit applications and they are usually held accountable on the basis of the value created from their customer base (Oldfield and Santomero 1995; Santomero 1997).
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While typically neglected in the banking and finance literature, from other fields of research we know that the personal attitudes and inclinations of professionals and other employees are important predictors of their behavior and decision-making (Fishbein and Ajzen 1975). Yet, as recent studies (Rauch and Frese 2007) suggest, specific attitudes and orientations, such as proactiveness, innovativeness and stress tolerance, are better predictors of behavior and job performance than broad categories of personality traits. As Barrick (2005) states: ‘narrow traits rely on explicit description that may be situated in time, place, or role’ (p. 367). We expect this will also be the case in the credit application process and in relation to renascent entrepreneurs. In particular, we explore the effect of more specific work-related orientations and of attitudes pertaining to bankruptcy on the willingness of bankers to provide credit to renascent entrepreneurs. The included variables reflect cognitive, affective and behavioral tendencies of bankers, as suggested by Dunham (1984) who stated that each of these types of tendencies may stimulate individuals to follow up on changes in organizational policies. Here, the affective component refers to the bankers’ feelings and emotions toward previous bankruptcy, the cognitive component concerns the information they possess about such previous bankruptcy based on what they believe to be true and, finally, the behavioral tendency reflects the intended behavior towards entrepreneurs who have been involved in a bankruptcy. Entrepreneurial attitude People have a natural tendency to be reluctant to change as they either fear the consequences of change (such as having to work harder) or have competing commitments (such as a personal belief that renascent entrepreneurs should not get a fresh start) (Kegan and Lahey 2001). Therefore, we expect that some bankers will continue to consider previous bankruptcy to be an important signal that an entrepreneur will be unsuccessful in the future. These bankers may fear that if these entrepreneurs default, they will be blamed for approving the credit application in the first place. Consequently, such bankers may remain unwilling to consider credit applications from renascent entrepreneurs. Also, we expect that some bankers will await the experiences of their more change-accepting colleagues, before also fully adjusting to the shift in policy. Yet this will not be the case for all bankers. In the past decade, many banks have stimulated their employees to become more proactive, innovative and risk-taking in order to create value, in other words to develop a more entrepreneurial attitude (Mair 2008; Wakkee et al. 2010). In general, employees respond differently to such expectations depending on both personal and organizational characteristics (Kelley et al. 2005), and, likewise, the evidence suggests that some bankers have (developed) a more entrepreneurial attitude than others (Wakkee et al. 2010). Other studies have shown that individuals with higher levels of entrepreneurial attitudes are more in favor of change and thus more willing to accept changes in corporate policy (Antoncic and Hisrich 2003; Stull 2005). This suggests that those bankers who score high on entrepreneurial attitude are more likely to adapt to new organizational policies. Furthermore, bankers with a more entrepreneurial attitude will more proactively search for opportunities to create value for their organization and its customers (Nasution et al. 2011). This behavioral component of entrepreneurial attitude suggests that bankers who are more entrepreneurial will be the first to implement the recent policy change and respond to credit
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applications from renascent entrepreneurs, as they will recognize the potential value that may be created by servicing this new target group. Consequently, we expect that having a more entrepreneurial attitude has a positive effect on the willingness of bankers to consider credit applications from renascent entrepreneurs. Therefore we hypothesize that: H1: Bankers who exhibit higher levels of individual entrepreneurial attitudes are more willing to consider credit applications of renascent entrepreneurs than those who are less entrepreneurial.
Commitment Professionals such as bankers are usually both highly autonomous in organizing their work as well as highly committed to being successful in their job, which is evidenced by their willingness to exert considerable effort in reaching professional or organizational goals, and to avoid failures (Tsoumbris and Xenikou 2010). Meyer (2009) views commitment as “an internal force that binds an individual to a target and to a course of action of relevance to this target” (p. 39). This means that when given the opportunity, professionals will select projects or cases that have a high chance of success and avoid risky cases. According to Sarasvathy et al. (1998) such behavior is particularly common in professionals who are held accountable for loss or failure by their organization—like bankers. Providing credit inherently involves some level of risk. After all, it is uncertain if a venture or entrepreneur will be able to repay the loan and the associated costs in the future. Not surprisingly, bankers are typically socialized in a way that leads to the avoidance of credit application processes that they think will involve above-average risk levels. Although this might assume that commitment to success has a negative effect on banker’s willingness to consider applications from renascent entrepreneurs (Abdou et al. 2008; Slovic et al. 2007), we here argue that commitment might also positively affect willingness. First, bankers with high levels of commitment to the credit provision process are more likely to thoroughly explore the potential of the various credit applications that are brought to their attention, in order to identify those cases with the highest success potential (Meyer 2009). Consequently, while credit approval is not guaranteed, we expect that bankers with high levels of commitment will not automatically disregard applications from renascent entrepreneurs, but rather want to evaluate such applications themselves using as much information or intelligence as possible in a given situation (Finucane et al. 2000). Second, by devoting more (cognitive) effort and trying to gather as much information as possible about the application, the venture and the entrepreneur, bankers with high levels of commitment will be able to diminish the risks associated with a potential credit approval and take appropriate action when necessary (Finucane et al. 2000). Because risk is reduced in this way, we expect that bankers with high levels of commitment are more willing to consider renascent entrepreneurs’ applications. Third, commitment, like entrepreneurial attitude, is often associated with a greater willingness to more rapidly implement policy changes as a result of their active involvement in their daily work processes (Madsen et al. 2005). The reason for this is that professionals who are highly committed to be successful in their work actively seek novel opportunities that will enhance their
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positive self-image (Bettis 1982; Sitkin and Pablo 1992) and enhance their reputation within the organization. Renascent entrepreneurs provide bankers who have high levels of commitment with the additional opportunities to achieve this. Consequently we present a second hypothesis: H2: Bankers with higher levels of commitment are more willing to consider credit applications from renascent entrepreneurs than bankers showing lower levels of commitment.
Stigma perceptions Stigma refers to marks or attributes that are deeply discrediting to a person based on stereotypes, and that separate individuals from the society or from the community in which they live (Kasperson et al. 2001; Semadeni et al. 2008). Goffman (1963) distinguished three types of stigma: physical stigma, racial stigma and behavioral stigma. Bankruptcy stigma is a form of behavioral stigma that arises when individuals are responsible for actions that defy laws or go against social norms, i.e. going bankrupt (Paetzold et al. 2008; Semadeni et al. 2008). Specifically, bankruptcy has generally been considered a sign of failure and inadequacy, without regard for external factors contributing to bankruptcy (Wiesenfeld et al. 2008). Although it has been suggested that the stigma of personal bankruptcy has diminished in recent years (Athreya 2004), there are no empirical studies to confirm this claim in relation to entrepreneurial bankruptcy. Rather, it seems that the stigma of bankruptcy persists to this day (Efrat 1999). The extent to which ex-bankrupts are stigmatized varies across countries and regions—Asian and European entrepreneurs are generally more heavily stigmatized than North-American entrepreneurs when confronted with bankruptcy (Dake 1992; Douglas and Wildavsky 1983; Saxenian 1996). Besides regional differences in stigmatization, individuals also show differences with respect to their susceptibility to stigma. Personal world views affect how individuals think and feel about right and wrong, about responsibilities to others and about the value and use of rules in society (Dake 1992). Individuals who consider failure to be unacceptable might be reluctant in dealing with failure and in dealing with individuals who have actually experienced it. Previous empirical studies show that most individuals tend to distance themselves from renascent entrepreneurs, as they have irrational beliefs about the peril posed by the stigma (Jones et al. 1984; Sutton and Callahan 1987). Some bankers may fear a new bankruptcy—making repayment of the credit impossible. Other bankers may fear coworkers’ negative comments about them being involved with a renascent entrepreneur. Therefore, due to the social nature of stigma (Goffman 1963), bankers will be less likely to invest in a relationship with an applicant and consider the application if they consider bankruptcy to be a cause for stigma. So we hypothesize that: H3a: Stigma perception has a negative effect on the willingness of a banker to consider credit applications from renascent entrepreneurs. Previous studies on stigmatization in relation to (mental) illnesses suggest that the impact of stigma perceptions on behavior (such as hiring a stigmatized individual) is
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dependent on various personal attributes (e.g. gender, ethnicity) and attitudes (Brown and Pinel 2003). Few studies, however, have focused on the factors that moderate the relationship between stigma perceptions and the willingness of individuals to provide a second chance to those who have failed in the past. Here we argue that both individual entrepreneurial attitudes and commitment levels can act as moderators between stigma perception and willingness to consider credit applications from renascent entrepreneurs. First, at the firm level, entrepreneurial behavior has strongly been associated with autonomy and independent thinking on the part of the organization’s employees (Lumpkin and Dess 1996). For instance Burgelman (1983) has argued that “the motor of corporate entrepreneurship resides in the autonomous initiatives of individuals at the operational levels in the organization” (p. 241). A long tradition of empirical research (Barron 1955; Crutchfield 1962; Feist 1999) has established that personal autonomy is a general trait of self-direction and willingness to depart from social norms when appropriate. This would mean that, even when perceiving that those who have been involved in bankruptcy are stigmatized, entrepreneurial bankers will be less likely to distance themselves ex ante from renascent entrepreneurs as they feel less constrained by what their peers might think of their association with this stigmatized group. Consequently, we hypothesize that: H3b: The negative relationship between stigma perception and willingness to consider credit applications from renascent entrepreneurs is positively affected by a banker’s entrepreneurial attitude. The effect of stigma perception on willingness to consider credit applications from renascent entrepreneurs is also expected to be moderated by commitment. Not only does commitment lead to an actual reduction of risk levels, as explained above, we also think that showing higher commitment levels can be considered an important signal to peers that extra precautions are being taken when dealing with renascent entrepreneurs. By sending out such signals bankers acknowledge potential concerns that these peers may have with respect to their association with the stigmatized group (Goffman 1963), thereby reducing the need to actually distance themselves from this group. Therefore we hypothesize that: H3c: The negative relationship between stigma perception and willingness to consider credit applications from renascent entrepreneurs is positively affected by a banker’s level of commitment in credit provision processes.
Learning perspective Although bankruptcy is generally considered as something negative, in fact, a previous bankruptcy could also be considered to be a more positive attribute for an entrepreneur. As stated in the introduction, entrepreneurs who experience a (near) failure typically perform better when setting up a second venture (McGrath 1999; Shepherd 2003; Shepherd et al. 2009; Wakkee 2013). Indeed, it has been argued that entrepreneurial failure may be more important than success, when it comes to the chance of success in the next entrepreneurial endeavor, as it provides
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entrepreneurs with more feedback on their experience (Politis and Gabrielsson 2009; Sitkin 1992). It is well documented in the literature that individuals differ with respect to the extent to which they perceive failure as an opportunity for learning, and that these differences are based on factors such as experience, self-efficacy, tolerance for failure and more general worldviews (Argyris 1985; Isen and Baron 1991; Shepherd 2003). Most of these studies, however, focus on the extent to which individuals learn from their own mistakes. Surprisingly little research has been conducted to determine to what extent learning-from-failure related self-efficacy also leads to a belief in other people’s abilities to learn from failure. Yet studies examining more general dispositions of individuals have shown that individuals differ in the extent to which they believe that others can change. According to Chiu et al. (1997), people hold either a more incremental theory, believing individuals can grow and develop, or they adhere to an entity theory, believing that people are fixed and stable over time. Since learning is a specific type of development process, following these notions we expect that significant differences exist in the extent to which individuals believe in the ability of other people to learn from previous mistakes. Following this logic, we argue that if bankers expect renascent entrepreneurs to be able to learn from previous bankruptcy, they will assess the risk of repeated failure as being lower (Bandura 1977; Shepherd et al. 2000). This will, consequently, raise their confidence that the entrepreneur will be able to repay credits or loans and so could be entitled to credit. Consequently, we hypothesize that: H4: The more bankers consider bankruptcy to be a learning experience for entrepreneurs, the more willing they are to consider credit applications from renascent entrepreneurs.
Experience Although in this study the focus is on personal attitudes and orientations, experience is a personal factor that has also been found to be a strong predictor of intentions and behavior in many entrepreneurship studies (Krueger and Brazeal 1994; Learned 1992). The policy change in relation to renascent entrepreneurs can be seen as innovation, and several authors (Attewell 1992; Shane 2000) have shown that experience is one of the most dominant factors in explaining how a person deals with change and responds to an innovation. Furthermore, prior studies on decision-making processes in risky situations (March and Shapira 1987; Thaler and Johnson 1990) have provided some interesting evidence for a positive relationship between willingness to take risks and prior success in doing so. The reason for this is that experience will help a person to evaluate the potential risk and value associated with the decision-making process. While no actual statistics on repeated defaulting could either be found in the literature or were available from banks, previous research has reported above-average survival rates (Metzger and Niefert 2006) and similar performance levels (Wakkee 2013) amongst renascent entrepreneurs compared to novice and other entrepreneurs. Therefore we consider it likely that bankers who previously approved credit applications from renascent entrepreneurs will typically have received the required repayments, thus building bankers’ confidence in this group. Therefore we expect that prior credit approval experience will
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Fig. 1 Overview of hypotheses
enhance the banker’s willingness to consider other credit applications from renascent entrepreneurs. So a final hypothesis is formulated: H5: Bankers who provided loans to renascent entrepreneurs in the past are more willing to consider credit applications from renascent entrepreneurs than those without such experience. This final hypothesis allows us to differentiate between the actual effects of personal attitudes and orientations and those of experience related factors. Figure 1 summarizes and graphically displays the theoretical model following from the discussion above.
Research method Sample and procedure To examine our predictions, we collected data from 1,586 employees working for one of the more than 50 local offices of a Dutch bank. This bank is one of the top three banks in the Netherlands when it comes to serving small, medium, and large sized enterprises (www.banken.nl). By 2007, this bank was the second largest bank in the Netherlands and the eighth largest in Europe by assets. At that time, the magazine The Banker and Fortune Global 500 placed it 15th in the list of the world’s biggest banks, and it had operations in 63 countries, with over 110,000 employees. By conducting this research at a single bank, we were able to focus on individual differences of bankers without controlling for corporate culture or policies. The data that were used in this study were collected before the start of the financial crisis. Since the start of the economic crisis, bankers have been more cautious in providing loans and credits to all types of entrepreneurs, regardless of their prior experience. Yet, based on the outcomes of a series of interviews with bankers working for various banks (Klemann
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2011), we are convinced that the financial crisis has not led to changes in the attitudes towards the specific group of ex-bankrupts. The respondents were all ‘small business bankers’ and responsible for small business credit applications. Within the bank these small business bankers are seen as generalists, and evaluate credit applications from a broad range of sectors. The electronic questionnaire used for this study started with a request from the CEO to participate in the survey, continued with an explanatory letter indicating the purpose of the survey, and concluded with a guarantee of strict confidentiality. The questionnaire was piloted among 11 employees (who were excluded from participation). In total, 608 participants (34 %) fully completed the questionnaire (495 males and 113 females), with an average age of 42 years (SD=9.71). The highest educational degree earned by participants included ‘secondary or vocational education degree or comparable’ (N=190), ‘bachelor’s degree or comparable’ (N=293), and ‘master’s degree’ (N=125). Five-hundred and fifty participants worked full-time (>36 hours per week), 37 participants worked 4 days a week (>32 hours), 21 participants worked less than 4 days (
