Symmetrical Information and Credit Rationing: Graphical Demonstrations
AbstractAs this article shows, the pro-debtor U.S. Bankruptcy Code alone can cause credit rationing, even without asymmetrical information in the market, because the code entails substantial costs to lenders if borrowers file for bankruptcy. In the absence of bankruptcy cost, lenders are always justified in raising interest rates and clearing markets. If the bankruptcy cost is nontrivial, however, lenders' profits are concave in the relevant range of interest rates. Thus, lenders cannot always clear the market by using higher rates. The study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities. A positive relationship was found between credit risk and the amount of pledged collateral, which is not necessarily true with models based on asymmetrical information.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 31078.
Date of creation: 2000
Date of revision: 08 Feb 2005
Publication status: Published in Financial Analysts Journal 56.2(2000): pp. 85-95
Company Failures; Credit Control; Debt;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
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