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The role of collateral in entrepreneurial finance
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Han, Liang, Fraser, Stuart and Storey, D. J. (2009) The role of collateral in entrepreneurial finance. Journal of Business Finance & Accounting, Vol.36 (No.3-4). pp. 424-455. doi:10.1111/j.1468-5957.2009.02132.x ISSN 0306-686X.
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Official URL: http://dx.doi.org/10.1111/j.1468-5957.2009.02132.x
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 | ||||
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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 |
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Journal or Publication Title: | Journal of Business Finance & Accounting | ||||
Publisher: | Wiley-Blackwell Publishing Ltd. | ||||
ISSN: | 0306-686X | ||||
Official Date: | April 2009 | ||||
Dates: |
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Volume: | Vol.36 | ||||
Number: | No.3-4 | ||||
Number of Pages: | 32 | ||||
Page Range: | pp. 424-455 | ||||
DOI: | 10.1111/j.1468-5957.2009.02132.x | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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