Uncovering Collateral Constraints

61 Pages Posted: 13 Mar 2014

Date Written: February 28, 2014

Abstract

Collateral plays two roles. It may be used as an ex-ante commitment mechanism against agency risk or for hedging expected default risk. Using cross-country loan level data, we find that the commitment motive alone explains collateralization. Going from the lowest to highest quartile of ex-ante agency risk distribution increases initial collateralization by 11 percentage points, controlling for the supply of collateral, but the same change in default risk leads to no change in collateralization. We also uncover a collateral “pecking order” driven solely by commitment concerns. While the bank is willing to accept firm-specific assets susceptible to agency risk for low agency risk firms, it prefers non-specific assets for firms prone to agency risk. We find that information environments with institutions such as credit registries and objective rating criteria increase rating precision, and show that our results are not a consequence of rating imprecision.

Keywords: Collateral, Lending, Agency

JEL Classification: G2, G3

Suggested Citation

Liberti, Jose Maria and Sturgess, Jason, Uncovering Collateral Constraints (February 28, 2014). Available at SSRN: https://ssrn.com/abstract=2407959 or http://dx.doi.org/10.2139/ssrn.2407959

Jose Maria Liberti

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

Jason Sturgess (Contact Author)

Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

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