associated with firm size but positively related to productivity and the country’s financial deepening. Betz and Ravasan (2016) show that the characteristics of prevailing collateral practices affect the allocation of credit in MENA countries. Finally, Ayyagari et al. (2021) exploit the introduction of credit bureaus to identify a positive (exogenous) credit supply shock and show its beneficial effect on firms’ access to finance.<sup>1</sup> Our paper contributes to this strand of the literature by providing evidence that, in some contexts, the demand side of the story may be equally important. More specifically, we show that the characteristics of the economic environment –and in particular the _perceived_ level and type of market competition– can have significant effects on firms’ demand for credit.

Finally, this paper is also related to the small but growing literature on the role of expectations in influencing firms’ decisions. The turmoil that followed the 2008-financial crisis gave new impulses to this field of research, with a number of studies connecting firms’ economic outcomes with their forward-looking expectations. Most of this literature called the attention to the role played by macroeconomic factors,<sup>2</sup> while only a few studies focused on firms’ expectations on their own future earnings. Within the latter, Gennaioli et al. (2016) show that for US companies corporate investment plans and actual investments are well explained by expected sales. Along the same line, Boneva et al. (2020) looks at UK firms to show substantial effects of expectations on pricing strategies and employment behavior. Finally, Enders et al. (2019a) study how changes in the outlook of German firms impact their real decisions, even if expectations turn out to be incorrect ex-post. We contribute to this literature by showing how firms’ expectations are affected by the competition of informal companies and that this effect goes beyond differences in firms’ fundamentals or realized performances. This may suggest that, even in absence of real obstacles, a firm’s lack of information or biased perception can significantly jeopardize its own growth through current investment decisions and demand for credit. Importantly, this is the first paper, to the best of our knowledge, providing evidence on expectations of firms within developing countries.

The paper proceeds as follows. Section 2 describes the data, the variables, and the sample composition. Section 3 describes the empirical analysis, presents the main results, and discusses the possible mechanisms explaining them. Section 4 summaries the analysis and discusses some policy implications of our results

# **2 Data**

Our main source of data is the WBES dataset, a large sample of privately-held companies constructed from a standardized and globally comparable survey administrated by the World Bank. Because of our research

> 1A companion literature uses randomized control trials to explore the effect of interventions alleviating micro-entrepreneurs’ financing constraints (de Mel et al., 2008; Banerjee et al., 2015; Crepon et al., 2015; Quinn and Woodruff, 2019).

> 2See Coibion et al. (2018), Enders et al. (2019b), Coibion et al. (2020), Coibion et al. (2020), and Tanaka et al. (2020).

3