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The role of collateral in entrepreneurial finance
journal contribution
posted on 2023-06-08, 10:08 authored by Liang Han, Stuart Fraser, David StoreyPrevious 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
History
Publication status
- Published
Journal
Journal of Business Finance and AccountingISSN
0306686XExternal DOI
Issue
3-4Volume
36Page range
424-455Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2012-02-06Usage metrics
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