Is there a paradox of pledgeability?

TY - JOUR

T1 - Is there a paradox of pledgeability?

AU - Bernhardt, Dan

AU - Koufopoulos, Kostas

AU - Trigilia, Giulio

N1 - © 2020 Elsevier B.V. All rights reserved. This is an author-produced version of the published paper. Uploaded with permission of the publisher/copyright holder. Further copying may not be permitted; contact the publisher for details

PY - 2020/5/15

Y1 - 2020/5/15

N2 - We show that in the limited-commitment framework of Donaldson, Gromb, and Piacentino (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm's financing constraint. We derive this conclusion using the same contracts considered by the authors and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a nonstate-contingent secured debt contract, which differs from the ones they consider.

AB - We show that in the limited-commitment framework of Donaldson, Gromb, and Piacentino (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm's financing constraint. We derive this conclusion using the same contracts considered by the authors and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a nonstate-contingent secured debt contract, which differs from the ones they consider.

KW - Collateral, Secured debt, Pledgeability

U2 - 10.1016/j.jfineco.2020.05.003

DO - 10.1016/j.jfineco.2020.05.003

M3 - Article

SN - 0304-405X

VL - 137

SP - 606

EP - 611

JO - Journal of Financial Economics

JF - Journal of Financial Economics

IS - 3

ER -