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Bank funding constraints and the cost of capital of small firms
- Publication Year :
- 2015
-
Abstract
- 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.
- Subjects :
- History
050208 finance
Polymers and Plastics
Strategic uncertainty
jel:C72
jel:D82
05 social sciences
Bank finance
Global games
JEL Classification index: D82, C72, G21, G32
[SHS.GESTION.FIN]Humanities and Social Sciences/Business administration/domain_shs.gestion.fin
[QFIN] Quantitative Finance [q-fin]
jel:G21
jel:G32
Industrial and Manufacturing Engineering
0502 economics and business
Small business
Optimal return
050207 economics
Business and International Management
Bank finance,Small business,Strategic uncertainty,Global games,Optimal return
Subjects
Details
- Database :
- OpenAIRE
- Accession number :
- edsair.doi.dedup.....d6cb65fd8e2a305b3440a61161b5e673