Do Banks Extract Informational Rents through Collateral?

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