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On the sequencing of projects, reputation building, and relationship finance

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  • Egli, Dominik
  • Ongena, Steven
  • Smith, David C.

Abstract

We study the decision entrepreneurs face in financing multiple and independent projects.If strategic defaults are assessed likely to occur, for example if judicial efficiency is low, entrepreneurs delay projects to seek sequential financing from a relationship lender.Such commitment-type borrowing allows the entrepreneur to build a private reputation for repayment and consequently reduces the cost of financing.However, if the ex-ante risk of strategic default in the economy is low, the beneffits of building a private reputation are outweighed by the holdup rents extractable by the incumbent financier.In this environment, entrepreneurs choose to finance all projects at once from single or multiple, arm's-length lenders.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 3 (2006)
Issue (Month): 1 (March)
Pages: 23-39

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Handle: RePEc:eee:finlet:v:3:y:2006:i:1:p:23-39

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Citations

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Cited by:
  1. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2009. "Foreign Currency Borrowing by Small Firms," CEPR Discussion Papers 7540, C.E.P.R. Discussion Papers.
  2. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland.
  3. Kislat, Carmen & Menkhoff, Lukas & Neuberger, Doris, 2013. "The use of collateral in formal and informal lending," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79765, Verein für Socialpolitik / German Economic Association.
  4. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
  5. Carmen Kislat & Lukas Menkhoff & Doris Neuberger, 2013. "The Use of Collateral in Formal and Informal Lending," Kiel Working Papers 1879, Kiel Institute for the World Economy.
  6. Martin Brown & Steven Ongena & Pinar Yesin, 2012. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Working Papers 2012-05, Swiss National Bank.
  7. Menkhoff, Lukas & Neuberger, Doris & Rungruxsirivorn, Ornsiri, 2012. "Collateral and its substitutes in emerging markets’ lending," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 817-834.
  8. Ergungor, O. Emre, 2008. "Financial system structure and economic growth: Structure matters," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 292-305.
  9. Brown, M. & Ongena, S. & Yesin, P., 2008. "Currency Denomination of Bank Loans: Evidence from Small Firms in Transition Countries," Discussion Paper 2008-16, Tilburg University, Center for Economic Research.

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