On the Sequencing of Projects, Reputation Building, and Relationship Finance

41 Pages Posted: 29 Apr 2002

See all articles by Dominik Egli

Dominik Egli

University of Bern - Institute of Economics

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: January 2002

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.

Keywords: relationship financing, reputation building, staged financing, contract enforcement, judicial efficiency

Suggested Citation

Egli, Dominik and Ongena, Steven R. G. and Smith, David Carl, On the Sequencing of Projects, Reputation Building, and Relationship Finance (January 2002). FRB International Finance Discussion Paper No. 718. Available at SSRN: https://ssrn.com/abstract=276557 or http://dx.doi.org/10.2139/ssrn.276557

Dominik Egli (Contact Author)

University of Bern - Institute of Economics

Gesellschaftstrasse 49
Bern, CH-3012
Switzerland

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Carl Smith

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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