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The Importance of Being Consulted

Does management consulting facilitate the access to credit for start-ups? This paper tries to answer the question by developing a theoretical framework where a firm applies for a bank loan to implement a risky project. The probability of success increases if the firm exerts a costly managerial extra-effort, but the bank is unable to observe such an effort: a moral hazard problem may therefore occur. During an economic downturn the project’s expected profitability is likely to be low relatively to the effort cost. In this case we find that credit is granted only if the bank hires a management consultant, even when the latter does not improve the business practice.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 712.

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Date of creation: Aug 2010
Date of revision:
Handle: RePEc:bol:bodewp:712
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  1. Nancy Huyghebaert & Linda M. Van de Gucht, 2007. "The Determinants of Financial Structure: New Insights from Business Start-ups," European Financial Management, European Financial Management Association, vol. 13(1), pages 101-133.
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  8. Laura Levaggi & Rosella Levaggi, 2007. "Regulation Strategies for Public Service Provision," Working Papers 0707, University of Brescia, Department of Economics.
  9. Amit, Raphael & Brander, James & Zott, Christoph, 1998. "Why do venture capital firms exist? theory and canadian evidence," Journal of Business Venturing, Elsevier, vol. 13(6), pages 441-466, November.
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  11. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, 04.
  12. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  13. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
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  15. Thomas Armbrüster, 2004. "Rationality and Its Symbols: Signalling Effects and Subjectification in Management Consulting," Journal of Management Studies, Wiley Blackwell, vol. 41(8), pages 1247-1269, December.
  16. Dominique Demougin & Oliver Fabel, 2007. "Entrepreneurship and the Division of Ownership in New Ventures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 111-128, 03.
  17. Robin Fincham, 1999. "The Consultant-Client Relationship: Critical Perspectives on the Management of Organizational Change," Journal of Management Studies, Wiley Blackwell, vol. 36(3), pages 335-351, 05.
  18. Kay Mitusch & Roland Strausz, . "Mediators and Mechanism Design: Why Firms Hire Consultants," Papers 005, Departmental Working Papers.
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