Three essays in entrepreneurial financial markets

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Steven H. Wagner (Creator)
The University of North Carolina at Greensboro (UNCG )
Web Site:
Kenneth Snowden

Abstract: Theorists have shown how credit enhancement in the generic form of collateral can mitigate market failures in credit markets. None of these models has explained, however, why a guarantee rather than collateral will appear in the equilibrium debt contract. In the first essay, I develop optimal debt contracting models under moral hazard to show that lower transactions costs associated with guarantees make them more efficient than collateral. The guarantee contract is feasible, however, only if the business owner is sufficiently wealthy relative to the loan amount. This result suggests that market failure may occur if a small business owner with a high-return project has inadequate personal wealth to guarantee a loan. The second essay in this dissertation uses data from the 2003 Survey of Small Business Finances to empirically test the predictions of the first essay. I estimate both multinomial logit and ordered probit models to examine the effect of guarantor wealth on the equilibrium enhancement structure for lines of credit. I find that increasing owner wealth results in an increased likelihood that a line of credit will be enhanced with only a personal guarantee and a decreased likelihood that the line of credit will be secured with collateral. I also find that use of the more efficient guarantee is less prevalent when the borrower is located in a non-competitive banking market. Both results are consistent with predictions of the first essay. Relationships between small businesses and financial intermediaries are generally viewed only as mechanisms that arise to mitigate informational asymmetries in credit markets. In the third essay, I use a pooled cross section of the 1988, 1993, 1998 and 2003 Surveys of Small Business Finances to study relationships between small businesses and their primary source of financial services. I find evidence that mechanisms other than mitigation of informational asymmetries in credit transactions influence the structure and benefits associated with maintaining relationships. I also find that the two empirical measures of relationship strength decreased between 1988 and 2003 as the small business credit market was being transformed by bank consolidation, financial deregulation and technological innovation in small business lending.

Additional Information

Language: English
Date: 2012
Economics, Commerce-Business
Small business $x Economic aspects
Small business $x Finance

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