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Contribution Details
Type | Journal Article |
Scope | Discipline-based scholarship |
Title | On the sequencing of projects, reputation building, and relationship finance |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
|
Journal Title | Finance Research Letters |
Publisher | Elsevier |
Geographical Reach | international |
ISSN | 1544-6123 |
Volume | 3 |
Number | 1 |
Page Range | 23 - 39 |
Date | 2006 |
Abstract Text | We study the decision an entrepreneur faces in financing multiple projects and show that relationship financing will arise endogenously in an environment where strategic defaults are likely, even when firms have access to arm's-length financing. Relationship financing allows an entrepreneur to build a private reputation for repayment that reduces the cost of financing. However, in an environment where the risk of strategic default is low, the benefits from reputation building are outweighed by holdup rents extractable by the incumbent lender. Entrepreneurs then choose to finance projects from single or multiple, arm's-length lenders. We relate these findings to studies that positively associate accounting standards, creditor rights, and legal enforcement with economic growth. |
Free access at | Official URL |
Official URL | http://www.sciencedirect.com/science/article/pii/S1544612305000565 |
Digital Object Identifier | 10.1016/j.frl.2005.08.005 |
Other Identification Number | merlin-id:11787 |
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