Credit and equity rationing in markets with adverse selection

Hellmann, Thomas and Stiglitz, Joseph (2000) Credit and equity rationing in markets with adverse selection. European Economic Review, 44. pp. 281-304.

Abstract

Previous theories of financial market rationing focussed on a single market, either the credit or the equity market. An interesting question is whether credit and equity rationing are mutually compatible, and how they interact. We consider a model with two-dimensional asymmetric information, where entrepreneurs have private information about both the expected returns and the risk of their projects. We show that credit and equity rationing may occur individually or simultaneously. Moreover, competition between the two markets may generate the adverse selection that leads to rationing outcomes.

Item Type: Article
Keywords: Credit market; Equity market; Rationing equilibrium; Adverse selection; finance
Subject(s): Finance
Date Deposited: 27 May 2015 13:15
Last Modified: 27 Feb 2017 11:48
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5333

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