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Author Black, Lamont K.
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Informational Lock-in ♦ Firm Transparency ♦ New Lender ♦ Information Disadvantage ♦ Net Decrease ♦ Transparent Firm ♦ Private Information ♦ Opposite Effect ♦ Winner Curse ♦ Small Business Firm ♦ Analytical Solution Show ♦ Bad Firm ♦ Information Asymmetry ♦ Competitive Outside Loan Offer ♦ Adverse Selection Problem ♦ Good Firm ♦ Benchmark Model ♦ Potential Lender
Abstract Existing lenders to firms tend to have private information about firms that is not available to other potential lenders. Due to this information disadvantage, outside lenders face an adverse selection problem. One might assume that greater firm transparency would increase outside lending, but such a conclusion may be premature. This paper solves a benchmark model of information asymmetries in lending and finds the opposite effect. Although an increase in firm transparency causes the outsider to win more good firms, the outsider also wins fewer bad firms because it faces less of a “winner’s curse. ” An analytical solution shows that greater firm transparency leads to a net decrease in the likelihood of a firm receiving a competitive outside loan offer. The prediction is tested using a sample of small business firms that borrow either from an existing lender or a new lender. The evidence generally suggests that transparent firms are less likely to borrow from a new lender.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article
Publisher Date 2010-01-01