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 0306-686X

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Abstract

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.
ISSN:	0306-686X
Date:	April 2009
Volume:	Vol.36
Number:	No.3-4
Number of Pages:	32
Page Range:	pp. 424-455
Identification Number:	10.1111/j.1468-5957.2009.02132.x
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/27987

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