ADM 2313 Lecture Notes - Lecture 11: Adverse Selection, Moral Hazard

• School: University of Ottawa
• Department: Administration
• Course: ADM 2313
• Professor: Mark Freel

Document Summary

> where the demand from small firms for external finance is greater than the willingness of financial institutions to supply finance. > debt gap - moral hazard and adverse selection produce credit rationing by banks, e. g. where security is not available. > equity gap - might exist where small firms are excluded from raising capital e. g. venture capital due diligence and risk assessment (estimated at < 500,000). > applies where security is unavailable to the bank. > scheme is not available if a conventional loan can be obtained and can only be applied where an application has been unsuccessful. > targeted at early stage (businesses less than 5 years old). > informational asymmetries can affect access to debt finance: start-ups , manufacturing and technology-based firms, young entrepreneurs, rural based locations. > discouraged borrower effects (women, embs as discussed in chapter 4) > younger businesses/young entrepreneurs have difficulties accessing debt finance.