Asset Measurement in Imperfect Credit Markets

30 Pages Posted: 7 Jan 2015 Last revised: 6 Jun 2015

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

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Date Written: June 5, 2015

Abstract

How should a firm measure a productive asset used as collateral in a credit agreement? To answer this question, we develop a model in which firms borrow funds subject to collateral constraints. We characterize the qualities of optimal asset measurements and analyze their interactions with financing needs, collateral constraints and interest rates. Because of real effects, complete transparency would reduce contracting efficiency and, hence, the measurement must be suitably adapted to credit conditions. The optimal measurement is asymmetric and reports precise information about high collateral values if credit frictions are low, but the reverse if credit frictions are high. Tighter credit market conditions may lead to more opaque measurements and increased investment, in the form of inefficient continuations.

Keywords: liquidity, financing, collateral, capital, lending, accounting

JEL Classification: D8, G1, M4

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige, Asset Measurement in Imperfect Credit Markets (June 5, 2015). Columbia Business School Research Paper No. 15-8. Available at SSRN: https://ssrn.com/abstract=2546041 or http://dx.doi.org/10.2139/ssrn.2546041

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management ( email )

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