Tests of Ex Ante versus Ex Post Theories of Collateral Using Private and Public Information

Federal Reserve Bank of Atlanta Working Paper Series No. 2010-6

32 Pages Posted: 29 Mar 2010

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

W. Scott Frame

Federal Reserve Bank of Dallas

Vasso Ioannidou

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2010

Abstract

Collateral is a widely used, but not well understood, debt-contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also include public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant although the ex ante theories are also valid for customers with short borrower-lender relationships that are relatively unknown to the lender.

Keywords: collateral, asymmetric information, banks

JEL Classification: G21, D82, G38

Suggested Citation

Berger, Allen N. and Frame, W. Scott and Ioannidou, Vasso, Tests of Ex Ante versus Ex Post Theories of Collateral Using Private and Public Information (March 2010). Federal Reserve Bank of Atlanta Working Paper Series No. 2010-6. Available at SSRN: https://ssrn.com/abstract=1577883 or http://dx.doi.org/10.2139/ssrn.1577883

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

Vasso Ioannidou

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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