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When Do Laws and Institutions Affect Recovery Rates on Collateral?

55 Pages Posted: 2 Feb 2016 Last revised: 8 Jul 2016

Vasso Ioannidou

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

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Jason Sturgess

Queen Mary University of London

Date Written: July 7, 2016

Abstract

We examine how law and institutions affect banks’ expected recovery rates on collateral using a novel dataset of secured loans made by a single bank across 16 countries, which includes a detailed description of the underlying assets pledged as collateral and the bank’s ex-ante appraised liquidation value. On average, expected recovery rates are higher where laws and institutions grant creditors stronger enforcement rights and bargaining power in the event of default. Using within-borrower estimation to compare recovery rates on different assets for the same borrower, we find that movable collateral that is less redeployable, more susceptible to agency problems, or faster to depreciate exhibits recovery rates that are lower and more vulnerable to laws and institutions. Further, the bank compensates for lower recovery rates in economies with weak performance by charging higher interest rates. The results shed light on one of the underlying economic channels through which weak laws and institutions undermine countries’ financial and economic development.

Suggested Citation

Ioannidou, Vasso and Degryse, Hans and Liberti, Jose Maria and Sturgess, Jason, When Do Laws and Institutions Affect Recovery Rates on Collateral? (July 7, 2016). Available at SSRN: https://ssrn.com/abstract=2725810

Vasso Ioannidou (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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

Queen Mary University of London ( email )

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

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