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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 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.

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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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Cited by:
  1. 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.
  2. Brown, M. & Ongena, S. & Yesin, P., 2011. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Discussion Paper 2011-099, Tilburg University, Center for Economic Research.
  3. Martin Brown & Steven Ongena & Pinar Yesin, 2009. "Foreign Currency Borrowing by Small Firms," Working Papers 2009-02, Swiss National Bank.
  4. Degryse, H.A. & Ongena, S., 2002. "Bank-firm relationships and international banking markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-92220, Tilburg University.
  5. 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.
  6. 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.
  7. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland.
  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.

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