Collateral and Competitive Equilibria with Moral Hazard and Private Information

Chan, Yuk-Shee; Thakor, Anjan V.

doi:10.2307/2328256

Cited by 168 publications

(98 citation statements)

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“…Thirdly, as far as the minimisation of the information asymmetry between borrower and lender is concerned, the borrower receives, in exchange for collateral, the advantage of a lower interest rate, but incurs the risk of losing collateral when the return of the project turns out to be too low (Chan and Kanatas 1985;Bester 1985;Besanko and Thakor 1987;Chan and Thakor 1987). When the borrower considers the chance of a low return as too large, the costs associated with 1 The statistical significance of the interaction term is usually not calculated by standard software (Ai and Norton 2003).…”

Section: Theory and Evidence On Secured Debtmentioning

confidence: 99%

Collateral, relationship lending and family firms

2008

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Section: Theory and Evidence On Secured Debtmentioning

confidence: 99%

Collateral, relationship lending and family firms

2008

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“…When lenders have less information regarding the quality of the borrowers' projects, borrowers may attempt to signal their credit worthiness to lenders by using secured debt (Chan and Kanatas, 1985;Besanko and Thakor, 1987;Chan and Thakor, 1987;Igawa and Kanatas, 1990). With secured debt, borrowers benefit from a lower interest rate, but suffer from the potential loss of collateral.…”

Section: Firm Qualitymentioning

confidence: 99%

Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

Chang

Chen

Hsing

et al. 2006

Rev Quant Finan Acc

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This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues. Copyright Springer Science+Business Media, LLC 2007Secured debt, Investment opportunities, Free cash flow,

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“…Chan and Thakor [8] study the optimal contracts between borrowers and lenders in a model with both moral hazard and adverse selection, risk neutrality (of both borrowers and lenders) and unconstrained access to a collateral good. The authors prove that, when lenders maximize the borrowers' rent, the optimal contract involves no rationing of either type of borrowers and fully collateralized loans.…”

Section: Appendix 2: Borrowers' Endowmentmentioning

confidence: 99%

Optimal debt contracts and moral hazard along the business cycle

Reichlin

Siconolfi

2004

Economic Theory

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We analyze the Pareto optimal contracts between lenders and borrowers in a model with asymmetric information. The model generalizes the Rothschild-Stiglitz pure adverse selection problem by including moral hazard. Entrepreneurs with unequal “abilities” borrow to finance alternative investment projects which differ in degree of risk and productivity. We determine the endogenous distribution of projects as functions of the amount of loanable funds, when lenders have no information about borrowers’ ability and technological choices. Then, we embed these results in a dynamic competitive economy and show that the average quality of the selected projects in equilibrium may be high in recessions and low in booms. This phenomenon may generate (a) multiple steady states, (b) a smaller impact of exogenous shocks on output relative to the full information case, (c) endogenous fluctuations

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Collateral and Competitive Equilibria with Moral Hazard and Private Information

Cited by 168 publications

References 0 publications

Collateral, relationship lending and family firms

Collateral, relationship lending and family firms

Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

Optimal debt contracts and moral hazard along the business cycle

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