 The Role of Collateral in Entrepreneurial FinanceLiang Han, Stuart Fraser and David J. Storey Journal of Business Finance & Accounting, 2009, vol. 36, issue 3‐4, 424-455 Abstract: 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. Date: 2009 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:36:y:2009:i:3-4:p:424-455 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker More articles in Journal of Business Finance & Accounting from Wiley Blackwell |
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