Firm Dynamics with Endogenous Collateral Constraints
34 Pages Posted: 4 Dec 2016 Last revised: 15 Dec 2017
Date Written: December 1, 2016
This paper studies the effect of limited collateral on firm growth. Collateral assets mitigate asymmetric information problem in business lending, but is limited by the size of the firm. Small firms' endogenous growth depends on how effective additional assets as collateral can be in lowering its cost of capital and gaining access to formal lending. In particular, a firm may optimally choose to remain small despite its ability to grow through cash flow reinvestments. And firms become locally risk-loving upon approaching the size necessary for accessing formal lending.
Keywords: Collateral Constraint, Firm Dynamics, Private Equity Premium, Growth Trap
JEL Classification: D21, G21, G31, L25
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