Collateral, bank monitoring and firm performance: The case of newly established wine-farmers

Abstract

The present study aims to learn how collateral affects firm performance in the case of newly established wine producers. The issue is to identify the effects of collateral in situations of asymmetric information when the bank is the main financial partner of the entrepreneurs involved. On one hand, the use of collateral may reduce the risk of overinvestment by entrepreneurs and thereby reduce the risk of repayment default. On the other hand, collateral may induce bad performance linked to a reduced monitoring of the investments by the bank. We herein test both hypotheses in two different cases: when the bank monitors the investments and when the bank does not. © 2013 Australian Agricultural and Resource Economics Society Inc. and Wiley Publishing Asia Pty Ltd.