Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141278
Authors: 
Schäfer, Dorothea
Year of Publication: 
2001
Citation: 
[Journal:] Schmalenbach Business Review [ISSN:] 1439-2917 [Volume:] 53 [Issue:] 4 [Pages:] 321-350
Abstract: 
Within a framework of debt renegotiation and a priori private information, what is the role of outside and inside collateral? The literature shows that unobservability of the project’s returns implies that the high-risk borrower is more inclined to pledge outside collateral than is the low-risk borrower. However, this finding does not hold when the bank can observe neither the project’s returns nor the borrower’s risk class. We show that in this scenario, low-valued outside collateral enables the low-risk entrepreneur to select himself, but high value outside collateral has no sorting potential at all. We also show that a bank’s incentive to sort borrowers may induce investment to preserve the value of the inside collateral and to build up restructuring know-how. If self-selection via outside collateral is operating, restructuring know-how reduces the cost of separation. If outside collateral gives rise to pooling, restructuring know-how may restore sorting.
Subjects: 
asymmetric information
restructuring know how
adverse selection
JEL: 
D82
G21
G33
Document Type: 
Article

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