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

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Author Info
Egli, D.
Ongena, S.
Smith, D.C. (Tilburg University, Center for Economic Research)

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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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1.

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Date of creation: 2001
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Handle: RePEc:dgr:kubcen:20011

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  4. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January. [Downloadable!] (restricted)
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  6. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06. [Downloadable!] (restricted)
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  16. Ongena, Steven & Smith, David C., 2001. "The duration of bank relationships," Journal of Financial Economics, Elsevier, vol. 61(3), pages 449-475, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 9(3), pages 401-417, November. [Downloadable!] (restricted)
  3. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland. [Downloadable!]
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