Bank funding constraints and the cost of capital of small firms - ESSEC Business School Accéder directement au contenu
Pré-Publication, Document De Travail Année : 2015

Bank funding constraints and the cost of capital of small firms

Résumé

This paper analyzes how banks' funding constraints impact the access and cost of capital of small firms. Banks raise external finance from a large number of small investors who face co-ordination problems and invest in small, risky businesses. When investors observe noisy signals about the true implementation cost of real sector projects, the model can be solved for a threshold equilibrium in the classical global games approach. We show that a "socially optimal" interest rate that maximizes the probability of success of the small firm is higher than the risk-free rate, because higher interest rates relax the bank's funding constraint. However, banks will generally set an interest rate higher than this socially optimal one. This gives rise to a built-in inefficiency of banking intermediation activity that can be corrected by various policy measures.
Fichier principal
Vignette du fichier
WP1501.pdf (628.3 Ko) Télécharger le fichier
Origine : Fichiers éditeurs autorisés sur une archive ouverte
Loading...

Dates et versions

hal-01109331 , version 1 (26-01-2015)

Identifiants

  • HAL Id : hal-01109331 , version 1

Citer

Oana Peia, Radu Vranceanu. Bank funding constraints and the cost of capital of small firms. 2015. ⟨hal-01109331⟩
170 Consultations
557 Téléchargements

Partager

Gmail Facebook X LinkedIn More