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 language | English |
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Pages (from-to) | 606-611 |
Number of pages | 6 |
Journal | Journal of Financial Economics |
Volume | 137 |
Issue number | 3 |
DOIs | |
Publication status | Published - 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 detailsKeywords
- Collateral, Secured debt, Pledgeability