Abstract
We examine how contract structures help resolve financing frictions arising from adverse selection when entrepreneurs sell their firms in private transactions. We find that seller financing is more common when capital is costly, and its use decreases when local private equity capital commitments are available. And this suggests that intermediaries such as private equity firms can play a role in efficiently allocating capital to entrepreneurial firms. Further, seller financing appears to be a substitute for the reduction of risk associated with government loan guaranties for private firms. Overall, we conclude that seller financing ---a costly contract structure for the entrepreneur --- is an important channel through which the firm quality is signalled when intermediary capital and government intervention is lacking.
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