Where Do Financial Constraints Originate from? An Empirical Analysis of Adverse Selection and Moral Hazard in Capital Markets
AbstractDespite the voluminous and growing literature on financial constraints, the origins of the constraints are hardly ever empirically analyzed. This paper offers such an analysis. We study, in particular, the empirical prevalence of adverse selection and moral hazard in capital markets using a unique survey data on Finnish small and medium-sized enterprises (SMEs). The survey data suggest that adverse selection is empirically more prevalent than moral hazard in the capital markets that the SMEs face. We also find that of the variables indicating the presence of adverse selection and moral hazard, the former has more explanatory power in regressions modeling the availability of external finance to the SMEs than the latter. Finally, we document that our proxies for adverse selection and moral hazard are inversely related to the age of firms, just like Peter Diamond’s (1989) model predicts. Copyright Springer 2006
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Bibliographic InfoArticle provided by Springer in its journal Small Business Economics.
Volume (Year): 27 (2006)
Issue (Month): 4 (December)
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Web page: http://www.springerlink.com/link.asp?id=100338
adverse selection; financial constraints; moral hazard; G14; G31; G32;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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