Do Banks Extract Informational Rents through Collateral?

71 Pages Posted: 6 Jun 2017 Last revised: 11 Jan 2018

See all articles by Bing Xu

Bing Xu

Banco de España

Adrian Van Rixtel

Banco de España - Department of International Economics & International Relations

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Date Written: March 1, 2017

Abstract

The use of collateral is one of the defining characteristics of loan contracts. This paper investigates if relationship lending and market concentration permit the extraction of informational rents through collateral. We apply equity IPOs as informational shocks that erode rent seeking opportunities. Using unique loan-level data for China, we find that collateral incidence increases with relationship intensity and bank market concentration for loans obtained before the IPO, while this effect is moderated after the IPO. We also demonstrate that the degree of rent extraction declines for less risky firms after the IPO; at the same time, it increases for more risky firms. These results are not driven by differences or changes in firm-specific financial risks. To our knowledge, our paper is the first to investigate the determinants of collateral for China using loan-level data.

Keywords: Informational Rents; Collateral; Relationship Lending; Market Structure; IPOs; China

JEL Classification: G21; L11

Suggested Citation

Xu, Bing and Rixtel, Adrian Van and Wang, Honglin, Do Banks Extract Informational Rents through Collateral? (March 1, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=2980969 or http://dx.doi.org/10.2139/ssrn.2980969

Bing Xu (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Adrian Van Rixtel

Banco de España - Department of International Economics & International Relations ( email )

Alcala 50
Madrid, 28014
Spain

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

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