Information Asymmetry at Debt Rollover and Startup Loans

73 Pages Posted: 11 Dec 2022 Last revised: 13 Nov 2023

See all articles by Chong Huang

Chong Huang

University of California, Irvine - Paul Merage School of Business

Fei Li

University of North Carolina (UNC) at Chapel Hill

Haibo Xu

Tongji University

Date Written: October 09, 2024

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

Suggested Citation

Huang, Chong and Li, Fei and Xu, Haibo, Information Asymmetry at Debt Rollover and Startup Loans (October 09, 2024). Available at SSRN: https://ssrn.com/abstract=4298800 or http://dx.doi.org/10.2139/ssrn.4298800

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Fei Li

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Haibo Xu

Tongji University ( email )

1239 Siping Road
Shanghai, 200092
China

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