English, Article edition: The Role of Collateral in Entrepreneurial Finance Liang Han; Stuart Fraser; David J. Storey

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Bookmark: http://trove.nla.gov.au/version/108601
Physical Description
  • article
Language
  • English

Edition details

Title
  • The Role of Collateral in Entrepreneurial Finance
Author
  • Liang Han
  • Stuart Fraser
  • David J. Storey
Physical Description
  • article
Notes
  • 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. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.
  • RePEc:bla:jbfnac:v:36:y:2009-04:i:3-4:p:424-455
Language
  • English
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