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

Author

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  • Dominik Egli
  • Steven Ongena
  • David C. Smith

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.

Suggested Citation

  • Dominik Egli & Steven Ongena & David C. Smith, 2002. "On the sequencing of projects, reputation building, and relationship finance," International Finance Discussion Papers 718, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:718
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    More about this item

    Keywords

    Corporations - Finance;

    JEL classification:

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

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