Collateral and debt maturity choice: A signaling model

B.W. Lensink, 27735 Pham

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This paper derives optimal loan policies under asymmetric information where banks offer loan contracts of long and short duration, backed or unbacked with collateral. The main novelty of the paper is that it analyzes a setting in which high quality firms use collateral as a complementary device along with debt maturity to signal their superiority. The least-cost signaling equilibrium depends on the relative costs of the signaling devices, the difference in firm quality and the proportion of good firms in the market. Model simulations suggest a non-monotonic relationship between firm quality and debt maturity, in which high quality firms have both long-term secured debt and short-term secured or non-secured debt.
Originele taal-2English
Plaats van productieGroningen
UitgeverUniversity of Groningen, SOM research school
Aantal pagina's59
VolumeSOM Research Reports
StatusPublished - 2005

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