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Where Do Financial Constraints Originate from? An Empirical Analysis of Adverse Selection and Moral Hazard in Capital Markets

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Author Info

  • Ari Hyytinen

    ()

  • Lotta Väänänen

    ()

Abstract

Despite 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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File URL: http://hdl.handle.net/10.1007/s11187-005-0610-2
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Bibliographic Info

Article provided by Springer in its journal Small Business Economics.

Volume (Year): 27 (2006)
Issue (Month): 4 (December)
Pages: 323-348

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Handle: RePEc:kap:sbusec:v:27:y:2006:i:4:p:323-348

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Web page: http://www.springerlink.com/link.asp?id=100338

Related research

Keywords: adverse selection; financial constraints; moral hazard; G14; G31; G32;

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References

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  1. Hyytinen, Ari & Pajarinen, Mika, 2002. "Small Business Finance in Finland. A Descriptive Study," Discussion Papers 812, The Research Institute of the Finnish Economy.
  2. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2002. "Does Local Financial Development Matter?," NBER Working Papers 8923, National Bureau of Economic Research, Inc.
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Cited by:
  1. Zambaldi, Felipe & Aranha, Francisco & Lopes, Hedibert & Politi, Ricardo, 2011. "Credit granting to small firms: A Brazilian case," Journal of Business Research, Elsevier, vol. 64(3), pages 309-315, March.
  2. Jarrow, Robert A., 2011. "Credit market equilibrium theory and evidence: Revisiting the structural versus reduced form credit risk model debate," Finance Research Letters, Elsevier, vol. 8(1), pages 2-7, March.
  3. Jae Kang & Almas Heshmati & Gyoung-Gyu Choi, 2008. "Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea," Small Business Economics, Springer, vol. 31(4), pages 443-443, December.
  4. Bruder, Jana & Neuberger, Doris & Räthke-Döppner, Solvig, 2008. "Financial constraints of ethnic entrepreneurship: Evidence from Germany," Thuenen-Series of Applied Economic Theory 84, University of Rostock, Institute of Economics.

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