Firm Dynamics with Endogenous Collateral Constraints

34 Pages Posted: 4 Dec 2016 Last revised: 15 Dec 2017

See all articles by Yizhou Xiao

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: December 1, 2016

Abstract

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

Suggested Citation

Xiao, Yizhou, Firm Dynamics with Endogenous Collateral Constraints (December 1, 2016). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2878815 or http://dx.doi.org/10.2139/ssrn.2878815

Yizhou Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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