The role of collateral in entrepreneurial finance
Han, Liang, Fraser, Stuart and Storey, David J.. (2009) The role of collateral in entrepreneurial finance. Journal of Business Finance & Accounting, Vol.36 (No.3-4). pp. 424-455. ISSN 0306-686XFull text not available from this repository.
Official URL: http://dx.doi.org/10.1111/j.1468-5957.2009.02132.x
Previous research has suggested collateral has the role of sorting entrepreneurs either by observed risk or by private information. In order to test these roles, this paper develops a model which incorporates a signalling process (sorting by observed risk) into the design of an incentive-compatible menu of loan contracts which works as a self-selection mechanism (sorting by private information). It then tests this Sorting by Signalling and Self-Selection Model, using the 1998 US Survey of Small Business Finances. It reports for the first time that: high type entrepreneurs are more likely to pledge collateral and pay a lower interest rate; and entrepreneurs who transfer good signals enjoy better contracts than those transferring bad signals. These findings suggest that the Sorting by Signalling and Self-Selection Model sheds more light on entrepreneurial debt finance than either the sorting-by-observed-risk or the sorting-by-private information paradigms on their own.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Centre for Small & Medium-Sized Enterprises
Faculty of Social Sciences > Warwick Business School
|Journal or Publication Title:||Journal of Business Finance & Accounting|
|Publisher:||Wiley-Blackwell Publishing Ltd.|
|Number of Pages:||32|
|Page Range:||pp. 424-455|
|Access rights to Published version:||Restricted or Subscription Access|
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