The Role of Collateral in Entrepreneurial Finance

Han, Liang and Fraser, Stuart and Storey, David J (2009) The Role of Collateral in Entrepreneurial Finance. Journal of Business Finance and Accounting, 36 (3&4 SR). pp. 424-455.

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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: Article
Uncontrolled Keywords: signalling;self-selection;collateral;contracts
Subjects: H Social Sciences > HF Commerce
?? HF5601 ??
H Social Sciences > HG Finance
Divisions: Schools and Research Institutes > Business School > Business and Human Resource Management
Research Priority Areas: Applied Business Research
Depositing User: Ineke Tijsma
Date Deposited: 25 Mar 2015 15:49
Last Modified: 25 Mar 2015 15:49
URI: http://eprints.glos.ac.uk/id/eprint/1529

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