Year: 2007
Author: Bigus, Jochen
Credit and Capital Markets – Kredit und Kapital, Vol. 40 (2007), Iss. 1 : pp. 131–144
Abstract
The Cost of Collateral in the Two Creditors Case
The literature emphasizes the benefits of collateral in mitigating problems of adverse selection or moral hazard. This paper shows, however, that collateral may also induce agency problems, if there are heterogeneous creditors, such as banks and suppliers, for instance. A special incentive problem might occur prior to bankruptcy if the bank loan is secured by external collateral. In order to save her private fortune, the entrepreneur may be tempted to repay the bank by liquidating the firm's assets before bank debt becomes due. Even the bank might benefit. The unsecured supplier will lose and might not be willing to lend in the first place. This might induce underinvestment.
Journal Article Details
Publisher Name: Global Science Press
Language: Multiple languages
DOI: https://doi.org/10.3790/ccm.40.1.131
Credit and Capital Markets – Kredit und Kapital, Vol. 40 (2007), Iss. 1 : pp. 131–144
Published online: 2007-01
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 14
Author Details
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