Is there a paradox of pledgeability?

Dan Bernhardt, Kostas Koufopoulos, Giulio Trigilia

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)606-611
Number of pages6
JournalJournal of Financial Economics
Volume137
Issue number3
DOIs
Publication statusPublished - 15 May 2020

Bibliographical note

© 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

Keywords

  • Collateral, Secured debt, Pledgeability

Cite this