The trade-off between cash flow and net present value

Article Abstract:

The observed market bias favoring firms with projects that generate early cash flows is analyzed. The bias in favor of cash flow over net present value is found to be not irrational. Cash flow is seen to have an information content, in an asymmetric information environment, and eases the problem of adverse selection. A multi-period model is presented representing entrepreneurs of varying ability, choosing projects from a mutually exclusive set, in order to maximize wealth.

Noncommercial research organizations, Models, Investments, Financial markets, Cash flow, Present value analysis

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Efficient credit rationing

Article Abstract:

Credit rationing is prevalent even in capital markets which have symmetrically distributed information. As a result of credit rationing, businessmen are not able to get the financing they need at current interest rates. A model of how credit rationing affects an entrepreneur with a given production function, profit expectations and credit demand is presented. It was concluded that credit rationing is practiced even at levels in which bankruptcy is not a possibility.

Research, Economics, Information theory, Commercial loans, Credit market, Credit markets, Information theory in economics

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Credit Rationing as a (Temporary) Suboptimal Equilibrum with Imperfect Information

Article Abstract:

Credit rationing is found to be a temporary suboptimal equilibrium for the risk-averse rate-setting intermediary in a monopolistic loan market. Partial rationing is attributed to incomplete information. The intermediary will revert to rate-setting.

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