On the Sequencing of Projects, Reputation Building and Relationship Finance

D. Egli, S. Ongena, D.C. Smith

Research output: Working paperDiscussion paperOther research output

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Abstract

We study the decision entrepreneurs face in financing multiple and independent projects.If strategic defaults are assessed likely to occur, for example if judicial efficiency is low, entrepreneurs delay projects to seek sequential financing from a relationship lender.Such commitment-type borrowing allows the entrepreneur to build a private reputation for repayment and consequently reduces the cost of financing.However, if the ex-ante risk of strategic default in the economy is low, the beneffits of building a private reputation are outweighed by the holdup rents extractable by the incumbent financier.In this environment, entrepreneurs choose to finance all projects at once from single or multiple, arm's-length lenders.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages34
Volume2001-1
Publication statusPublished - 2001

Publication series

NameCentER Discussion Paper
Volume2001-1

Fingerprint

Finance
Entrepreneurs
Sequencing
Financing
Borrowing
Holdup
Incumbents
Rent
Sequential financing
Costs

Keywords

  • project financing

Cite this

Egli, D., Ongena, S., & Smith, D. C. (2001). On the Sequencing of Projects, Reputation Building and Relationship Finance. (CentER Discussion Paper; Vol. 2001-1). Tilburg: Finance.
Egli, D. ; Ongena, S. ; Smith, D.C. / On the Sequencing of Projects, Reputation Building and Relationship Finance. Tilburg : Finance, 2001. (CentER Discussion Paper).
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Egli, D, Ongena, S & Smith, DC 2001 'On the Sequencing of Projects, Reputation Building and Relationship Finance' CentER Discussion Paper, vol. 2001-1, Finance, Tilburg.

On the Sequencing of Projects, Reputation Building and Relationship Finance. / Egli, D.; Ongena, S.; Smith, D.C.

Tilburg : Finance, 2001. (CentER Discussion Paper; Vol. 2001-1).

Research output: Working paperDiscussion paperOther research output

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T1 - On the Sequencing of Projects, Reputation Building and Relationship Finance

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N2 - We study the decision entrepreneurs face in financing multiple and independent projects.If strategic defaults are assessed likely to occur, for example if judicial efficiency is low, entrepreneurs delay projects to seek sequential financing from a relationship lender.Such commitment-type borrowing allows the entrepreneur to build a private reputation for repayment and consequently reduces the cost of financing.However, if the ex-ante risk of strategic default in the economy is low, the beneffits of building a private reputation are outweighed by the holdup rents extractable by the incumbent financier.In this environment, entrepreneurs choose to finance all projects at once from single or multiple, arm's-length lenders.

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Egli D, Ongena S, Smith DC. On the Sequencing of Projects, Reputation Building and Relationship Finance. Tilburg: Finance. 2001. (CentER Discussion Paper).