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). pp. 424-455. ISSN 0306686X

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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
Schools and Departments: School of Business, Management and Economics > Business and Management
Depositing User: David Storey
Date Deposited: 06 Feb 2012 21:29
Last Modified: 11 Sep 2012 10:49
URI: http://sro.sussex.ac.uk/id/eprint/31448
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