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Collateralisation, interest rates and signalling in entrepreneurial finance
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Han, Liang (2005) Collateralisation, interest rates and signalling in entrepreneurial finance. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b1788776~S1
Abstract
Berger and Udell (1990) made an important distinction between sorting-byobserved-
risk (SBOR) and sorting-by-private-information (SBPI) as responses to
asymmetric information in financing entrepreneurial ventures. The current
research seeks not to distinguish, but to integrate, these responses in what is
called Signalling and Self-Selection (SASS) model. By developing Bester’s
(1985) model, the SASS model is one in which the type (high or low) of the
entrepreneur is private information known only to the entrepreneur and the bank
offers a menu of contracts as a self-selection mechanism. The SASS model
proposes that high-type entrepreneurs, who have a high probability of success
and high project returns, are more likely to choose a contract with high collateral
but low interest rate. Low-type entrepreneurs, who have a low probability of
success and low project returns, are more likely to choose a contract with low
collateral but high interest rate. The SASS model predicts that the arrangement
and choice of debt contracts is influenced by loan characteristics, signals
transferred by entrepreneurs and the relationship between the entrepreneur and
the bank.
The 1998 U.S. Survey of Small Business Finances is used to empirically test the
hypotheses derived from the SASS model. This research includes, for the first
time, many personal characteristics of the entrepreneur in regressions seeking to
explain collateralisation and interest rates. The empirical results imply that both
the signalling process and the self-selection mechanism influence the outcome of
entrepreneurial debt finance, which in turn depends on the scale of asymmetric information. Less risky entrepreneurs are more likely to pledge collateral,
suggesting that private information strongly influences the collateralisation
decision. It also seems that the signals of the entrepreneur are as important as the
signals of the business, since entrepreneurs with ‘good’ signals enjoy more
favourable contracts than those with ‘bad’ signals. The evidence from this thesis
emphasises that there are considerable returns to the ‘good’ entrepreneur, in
conditions of asymmetric information, in signalling her ability to the lender.
Moreover, it also finds that relationship lending significantly reduces the interest
rates charged on loans.
Another contribution of this research is that, by investigating discouraged
borrowers, it empirically examines the degree of problem of information
asymmetries in small business financial markets, on which the above hypotheses
tests are based. This research, for the first time, reports evidence that information
asymmetries influence the discouragement of high-risk and low-risk small
business from applying external finance in opposite directions. It also suggests
that small business financial markets are informationally efficient because bad
borrowers are more likely to be discouraged by symmetric information than good
borrowers by asymmetric information.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Library of Congress Subject Headings (LCSH): | New business enterprises -- Finance -- Econometric models, Information asymmetry | ||||
Official Date: | June 2005 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Storey, D. J. ; Fraser, Stuart | ||||
Extent: | xv, 268 p. | ||||
Language: | eng |
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