Is There a Paradox of Pledgeability?

13 Pages Posted: 19 Nov 2019 Last revised: 21 Apr 2020

See all articles by Dan Bernhardt

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Kostas Koufopoulos

University of York

Giulio Trigilia

University of Rochester - Simon Business School

Date Written: December 30, 2019

Abstract

We show that in the limited-commitment framework of Donaldson, Gromb and Piacentino (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm’s financing constraint. We derive this conclusion using the same con- tracts considered by the authors, and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a non- state-contingent secured debt contract, which differs from the ones they consider.

Keywords: Collateral, Secured debt, Pledgeability

JEL Classification: G21, G32, G33, G38

Suggested Citation

Bernhardt, Dan and Koufopoulos, Kostas and Trigilia, Giulio, Is There a Paradox of Pledgeability? (December 30, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481721 or http://dx.doi.org/10.2139/ssrn.3481721

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Kostas Koufopoulos

University of York ( email )

Heslington
York, YO1 5DD
United Kingdom

Giulio Trigilia (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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