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

  • Egli, Dominik
  • Ongena, Steven
  • Smith, David C.

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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