Is there a paradox of pledgeability?

Dan Bernhardt, Kostas Koufopoulos and Giulio Trigilia

Journal of Financial Economics, 2020, vol. 137, issue 3, 606-611

Abstract: We show that in the limited-commitment framework of Donaldson et al. (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm’s financing constraint. We derive this conclusion using the same contracts considered by the authors and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a nonstate-contingent secured debt contract, which differs from the ones they consider.

Keywords: Collateral; Secured debt; Pledgeability (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 G38 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Is there a paradox of pledgeability? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:3:p:606-611

DOI: 10.1016/j.jfineco.2020.05.003

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