IDEAS home Printed from https://ideas.repec.org/p/tiu/tiucen/e2ae0542-fa14-4e34-b221-0d39d05f2621.html
   My bibliography  Save this paper

On the Sequencing of Projects, Reputation Building and Relationship Finance

Author

Listed:
  • Egli, D.
  • Ongena, S.

    (Tilburg University, Center For Economic Research)

  • Smith, D.C.

Abstract

We study the decision an entrepreneur faces in financing multiple projects and show that relationship financing will arise endogenously in an environment where strategic defaults are likely, even when firms have access to arm's-length financing. Relationship financing allows an entrepreneur to build a private reputation for repayment that reduces the cost of financing. However, in an environment where the risk of strategic default is low, the benefits from reputation building are outweighed by holdup rents extractable by the incumbent lender. Entrepreneurs then choose to finance projects from single or multiple arm's-length lenders.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Egli, D. & Ongena, S. & Smith, D.C., 2001. "On the Sequencing of Projects, Reputation Building and Relationship Finance," Discussion Paper 2001-1, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:e2ae0542-fa14-4e34-b221-0d39d05f2621
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/ws/portalfiles/portal/537827/1.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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, April.
    2. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD Publishing.
    3. Davide IACOVONI & Alberto ZAZZARO, 2000. "Legal System Efficiency, Information Production, and Technological Choice: A Banking Model," Working Papers 129, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    4. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March.
    5. Darwin V. Neher, 1999. "Staged Financing: An Agency Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 255-274.
    6. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    7. Smith, David C., 2003. "Loans to Japanese borrowers," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 283-304, September.
    8. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    9. Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 557-575.
    10. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
    11. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    12. Franklin Allen & Douglas Gale, 1999. "Innovations in Financial Services, Relationships, and Risk Sharing," Management Science, INFORMS, vol. 45(9), pages 1239-1253, September.
    13. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    14. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    15. Boot, Arnoud & Thakor, Anjan V. & Udell, Gregory F., 1987. "Competition, risk neutrality and loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 449-471, September.
    16. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    17. Boot, Arnoud W. A. & Thakor, Anjan V. & Udell, Gregory F., 1991. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 605-632, June.
    18. Jappelli, Tullio & Pagano, Marco & Bianco, Magda, 2005. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 223-244, April.
    19. Das, Sanjiv R. & Nanda, Ashish, 1999. "A theory of banking structure," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 863-895, June.
    20. 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, June.
    21. Sharpe, Steven A, 1990. "Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    22. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    23. Campbell, Tim S., 1979. "Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 913-924, December.
    24. Jappelli, Tullio & Pagano, Marco, 2002. "Information sharing, lending and defaults: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 2017-2045, October.
    25. Gompers, Paul A, 1995. "Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
    26. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
    27. Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 415-432.
    28. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    29. Parikshit Ghosh & Debraj Ray, 1996. "Cooperation in Community Interaction Without Information Flows," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 491-519.
    30. Morgan, Donald P, 1994. "Bank Credit Commitments, Credit Rationing, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 87-101, February.
    31. 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.
    32. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    33. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    34. Stiglitz, J & Weiss, A, 1983. "Alternative Approaches to Analyzing Markets with Asymmetric Information: Reply [The Theory of 'Screening,' Education, and the Distribution of Income]," American Economic Review, American Economic Association, vol. 73(1), pages 246-249, March.
    35. Admati, Anat R & Pfleiderer, Paul, 1994. "Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
    36. Chan, Yuk-Shee & Greenbaum, Stuart I. & Thakor, Anjan V., 1986. "Information reusability, competition and bank asset quality," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 243-253, June.
    37. Campbell, Tim S., 1979. "Abstract: Optimal Investment Financing Decisions and the Value of Confidentiality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(4), pages 669-669, November.
    38. Ongena, S. & Smith, D.C., 2000. "Bank relationships : A review," Other publications TiSEM 993b88a5-9a0f-42de-9cec-6, Tilburg University, School of Economics and Management.
    39. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    40. David C. Smith, 2003. "Loans to Japanese borrowers," International Finance Discussion Papers 769, Board of Governors of the Federal Reserve System (U.S.).
    41. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    42. Jonathan B. Berk, 1999. "A Simple Approach for Deciding When to Invest," American Economic Review, American Economic Association, vol. 89(5), pages 1319-1326, December.
    43. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    44. Donald P. Morgan, 1990. "Bank credit commitments," Research Working Paper 90-10, Federal Reserve Bank of Kansas City.
    45. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(1), pages 1-32.
    46. Shockley, Richard L & Thakor, Anjan V, 1997. "Bank Loan Commitment Contracts: Data, Theory, and Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 517-534, November.
    47. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
    48. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    49. Houston, Joel F & James, Christopher M, 2001. "Do Relationships Have Limits? Banking Relationships, Financial Constraints, and Investment," The Journal of Business, University of Chicago Press, vol. 74(3), pages 347-374, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    2. Christophe J. GODLEWSKI & Ydriss Ziane, 2008. "How many banks does it take to lend? Empirical evidence from Europe," Working Papers of LaRGE Research Center 2008-11, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    3. Ghosh, Chinmoy & He, Fan, 2023. "The impact of laws and institutions on financial contracts: Evidence from relationship lending across the world," Journal of Banking & Finance, Elsevier, vol. 148(C).
    4. Bharat N. Anand & Alexander Galetovic, 2002. "Does Competition Kill Relationships? Inside Investment Banking," Documentos de Trabajo 119, Centro de Economía Aplicada, Universidad de Chile.
    5. Régis Breton, 2003. "A Smoke Screen Theory of Financial Intermediation," Post-Print halshs-00257188, HAL.
    6. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Discussion Paper 2010-63, Tilburg University, Center for Economic Research.
    7. Tlili, Rim, 2012. "Comment justifier la multibancarité au sein des PME ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10919 edited by Etner, François.
    8. Kang, Jun-Koo & Li, Yingxiang & Oh, Seungjoon, 2022. "Venture Capital Coordination in Syndicates, Corporate Monitoring, and Firm Performance," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    9. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    10. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    11. Ongena, S. & Smith, D.C., 2000. "Bank relationships : A review," Other publications TiSEM 993b88a5-9a0f-42de-9cec-6, Tilburg University, School of Economics and Management.
    12. Elsas, Ralf & Krahnen, Jan Pieter, 2003. "Universal Banks and Relationships with Firms," CFS Working Paper Series 2003/20, Center for Financial Studies (CFS).
    13. Carletti, Elena & Cerasi, Vittoria & Daltung, Sonja, 2007. "Multiple-bank lending: Diversification and free-riding in monitoring," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 425-451, July.
    14. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 300df022-4701-4773-a8b7-c, Tilburg University, School of Economics and Management.
    15. Manoj Athavale & Robert O. Edmister, 2004. "The Pricing of Sequential Bank Loans," The Financial Review, Eastern Finance Association, vol. 39(2), pages 231-253, May.
    16. Annalisa Castelli & Gerald P. Dwyer & Iftekhar Hasan, 2012. "Bank Relationships and Firms' Financial Performance: The Italian Experience," European Financial Management, European Financial Management Association, vol. 18(1), pages 28-67, January.
    17. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 40d5005c-1626-4511-aa8a-f, Tilburg University, School of Economics and Management.
    18. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej [Bank-firm relationships in Poland in the light of data from bank reporting]," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.
    19. Annalisa Castelli & Gerald P. Dwyer & Iftekhar Hasan, 2006. "Bank relationships and small firms’ financial performance," FRB Atlanta Working Paper 2006-05, Federal Reserve Bank of Atlanta.
    20. Yu, Y., 2014. "Essays on relationship banking," Other publications TiSEM f3d56b9e-e79e-46c4-bd42-4, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    project financing;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiucen:e2ae0542-fa14-4e34-b221-0d39d05f2621. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Broekman (email available below). General contact details of provider: http://center.uvt.nl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.