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 and Accounting, 36 (3&4 SR). pp. 424-455. doi:10.1111/j.1468-5957.2009.02132.x

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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
Article Type: Article
Uncontrolled Keywords: signalling;self-selection;collateral;contracts
Subjects: H Social Sciences > HF Commerce

H Social Sciences > HG Finance
Divisions: Schools and Research Institutes > School of Business, Computing and Social Sciences
Research Priority Areas: Applied Business & Technology
Depositing User: Ineke Tijsma
Date Deposited: 25 Mar 2015 15:49
Last Modified: 07 Aug 2023 15:09

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