Credit and equity rationing in markets with adverse selection

Previous theories of financial market rationing focussed on a single market, either the credit or the equity market. An interesting question is whether credit and equity rationing are mutually compatible, and how they interact. We consider a model with two-dimensional asymmetric information, where entrepreneurs have private information about both the expected returns and the risk of their projects. We show that credit and equity rationing may occur individually or simultaneously. Moreover, competition between the two markets may generate the adverse selection that leads to rationing outcomes.

[1]  Signalling in credit markets , 1984 .

[2]  George A. Akerlof,et al.  Looting: The Economic Underworld of Bankruptcy for Profit , 1994 .

[3]  Joseph E. Stiglitz,et al.  Recent developments in corporate finance: Credit rationing and collateral , 1986 .

[4]  H. Wette.  Collateral in Credit Rationing in Markets with Imperfect Information: Note , 1983 .

[5]  Andrew M Weiss,et al.  Sorting Out the Differences between Signaling and Screening Models , 1990 .

[6]  Yoonje Cho.  Inefficiencies from Financial Liberalization in the Absence of Well-Functioning Equity Markets , 1986 .

[7]  J. Riley,et al.  Signaling in Credit Markets , 1988 .

[8]  M. Brennan,et al.  Efficient Financing under Asymmetric Information , 1987 .

[9]  Colin Mayer,et al.  Recent developments in corporate finance: List of figures , 1986 .

[10]  Mark Grinblatt,et al.  Signalling and the Pricing of New Issues , 1989 .

[11]  Andrew M Weiss.  Macro-Economic Equilibrium and Credit Rationing , 1987 .

[12]  B. Greenwald,et al.  Informational Imperfections and Macro-economic Fluctuations , 1984 .

[13]  J. Stiglitz,et al.  Credit Rationing in Markets with Imperfect Information , 1981 .

[14]  M. Ibrahímo,et al.  The Performance of Credit Markets under Asymmetric Information about Project Means and Variances , 1992 .

[15]  N. Mankiw,et al.  The Allocation of Credit and Financial Collapse , 1986 .

[16]  Helmut Bester,et al.  Screening vs. Rationing in Credit Markets with Imperfect Information , 1985 .

[17]  Maxim Engers,et al.  Signalling with Many Signals , 1987 .

[18]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[19]  J. Stiglitz,et al.  Information and Capital Markets , 1981 .

[20]  David C. Webb,et al.  Too Much Investment: A Problem of Asymmetric Information , 1987 .

[21]  Stephen D. Williamson.  Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing , 1987 .