# **1. Introduction**

Most entrepreneurs, particularly female-led firms, are unable to grow their businesses beyond smallscale operations. Firm growth is constrained by many factors, including access to finance, skills, technology, and networks. Evidence points to significantly greater challenges in accessing finance among female-led businesses compared to their male counterparts.<sup>1</sup> The growth of women-led firms is further constrained by contextual factors such as regulatory and legal restrictions, social perceptions about women, and gender-based violence (Ubfal, 2023). As policy makers seek to improve the business environment for private investments, a deeper understanding of the specific constraints faced by women entrepreneurs can help maximize the efficacy of these efforts. This paper contributes to an understanding of financial constraints faced by women-managed firms, especially in contexts of stringent social norms, by using firm-level data from 61 countries.

Gender disparities in financial access can be attributed to demand-side factors, including social and cultural norms that affect the ability of female entrepreneurs to apply for credit (Cole and Mehran, 2018) or access external funds (Aspray and Cohoon, 2007; Asiedu et al., 2013; Guzman and Kacperczyk, 2019). On the supply side, explicit discrimination, such as imposing higher interest rates (Muravyev et al., 2009; Alesina et al., 2013), or additional implicit requirements on collateral (Cowling et al., 2020) or guarantors (Brock and De Haas, 2023), increases the probability of their credit application rejection (Aristei and Gallo, 2016).<sup>2</sup> These factors can vary significantly by country context where pronounced gender bias, in addition to systemic issues in the development of financial institutions, can play a crucial role (Hewa-Wellalage et al., 2022; Bertrand and Perrin, 2022).

Gender equality is crucial not only for its social value, but also for its significant impact on broader macroeconomic outcomes. For example, Morazzoni and Sy (2022) show that credit constraints that disproportionately penalize female-led firms lead to capital misallocation and aggregate production losses in the United States. Likewise, Ranasinghe (2024) finds that female-led firms face challenges in operating a business mainly due to higher credit market distortions which impose an implicit tax on capital. These distortions are especially higher in poorer countries, and negatively affect market shares and average firm size of female-led firms. It is not surprising that barriers to female entrepreneurship lead to large productivity losses, as shown in Chiplunkar and Goldberg (2021) for India.

We contribute to the literature by studying the misallocation of credit using cross-country data. Although country-level studies (e.g. Alesina et al., 2013; de Andrés et al., 2021; Morazzoni and Sy, 2022; Basiglio et al., 2023) allow for an understanding of financial frictions faced by female-led firms, they provide limited insights on the _entrenched_ differences in gender inequalities in certain groups of

> 1See for example, Coleman and Robb (2009); Muravyev et al. (2009); Bellucci et al. (2010); Stefani and Vacca (2013); Alesina et al. (2013); Ongena and Popov (2016); Aristei and Gallo (2016); Morazzoni and Sy (2022). However, some studies do not find evidence of gender-based differences in access to credit (Blanchflower et al., 2003; Bruhn, 2009; Bardasi et al., 2011; Aterido et al., 2013; Basiglio et al., 2023).

> 2Some studies also suggest that the rejection rates for credit applications vary by context, as evidenced in the United Kingdom where rejection rates for women-led firms were lower during the crisis perhaps due to their conservative financial behavior (Cowling et al., 2020).

2