 The commitment problem of secured lendingDaniela Fabbri and Anna Maria Menichini Journal of Financial Economics, 2016, vol. 120, issue 3, 561-584 Abstract: The paper presents a new theory of trade credit in which firms buy inputs on credit from suppliers to restore the benefits of secured bank financing impaired by contract incompleteness. In a setting where investment is endogenous and unobservable to financiers, we show that a bank-secured credit contract is time-inconsistent. Upon being granted credit, the entrepreneur has an incentive to alter the original input combination, jeopardizing the bank’s revenues. Anticipating the entrepreneur’s opportunism, the bank offers an unsecured credit contract, reducing the surplus from the venture. One way for the entrepreneur to commit to the contract terms is to purchase inputs on credit from the supplier. The supplier observes the input investment and acts as a guarantor that inputs will be purchased as contracted, thus facilitating access to secured bank financing. The commitment role of trade credit still holds in a multi-period extension that investigates the impact of bank relationship lending on secured debt and trade credit. Our model provides novel testable predictions on optimal financial contracts in both one-period and repeated lending relationships. Keywords: Collateral; Commitment; Trade credit; Bank financing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:120:y:2016:i:3:p:561-584 DOI: 10.1016/j.jfineco.2016.02.009 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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