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On the Sequencing of Projects, Reputation Building and Relationship Finance

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  • Egli, D.
  • Ongena, S.

    (Tilburg University, Center For Economic Research)

  • Smith, D.C.

Abstract

We study the decision an entrepreneur faces in financing multiple projects and show that relationship financing will arise endogenously in an environment where strategic defaults are likely, even when firms have access to arm's-length financing. Relationship financing allows an entrepreneur to build a private reputation for repayment that reduces the cost of financing. However, in an environment where the risk of strategic default is low, the benefits from reputation building are outweighed by holdup rents extractable by the incumbent lender. Entrepreneurs then choose to finance projects from single or multiple arm's-length lenders.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Egli, D. & Ongena, S. & Smith, D.C., 2001. "On the Sequencing of Projects, Reputation Building and Relationship Finance," Discussion Paper 2001-1, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:e2ae0542-fa14-4e34-b221-0d39d05f2621
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    More about this item

    Keywords

    project financing;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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