Information Asymmetry at Debt Rollover and Startup Loans

Abstract

To shed light on information regulation in credit markets, this paper studies how information asymmetry at firm debt rollover affects firm initial borrowing capacity. In our model, investors in startup loan market account for effects of future public signals (whose structure determines information asymmetry) on debt rollover outcomes. We show that compared with a full-revealing signal structure, some coarser signal structures enhance firm borrowing capacity. A pass-or-fail signal structure optimally balances startup loan issuer’s liquidity risk and information rent dissipation, maximizing firm borrowing capacity. The pass-or-fail signal structure whose associated borrowing capacity equal to borrowing need maximizes social welfare.

Keywords: startup loan, real effect, debt rollover, liquidity, transparency, Small and medium enterprise, Private Credit Rating Scale