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The Role of Fixed Assets in Reducing Asymmetric Information

  • Antonio Affuso
Chapter
Part of the Contributions to Economics book series (CE)

Abstract

The paper presents a model where fixed assets play a role in reducing credit rationing. The basic idea is that when loans are collateralized and firms are credit constrained, the amount borrowed is generated by the value of the collateral. I use a classical credit rationing model to explain the link between firms’ debt capacities and asset value in the case of distress. As we shall see, the price of fixed assets depends on whether there are firms that repurchase them. In fact, it depends on the number of bad firms in the economy as well as on the liquidity of good firms. In this model, a separating equilibrium can only occur if there exist a number of bad firms that go bankrupt and if there exist good firms with sufficient liquidity. Each firm derives positive externalities from the existence of other firms. Indeed, the optimal leverage of firms depends on the possibility of repurchasing the distressed assets.

Keywords

Cash Flow Asset Price Credit Rationing Positive Externality Financial Intermediary 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

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Copyright information

© Springer Physica-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.University of ParmaParmaItaly

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