Why Do Borrowers Pledge Collateral? New Empirical Evidence on the Role of Asymmetric Information

FRB of Atlanta Working Paper No. 2006-29a

32 Pages Posted: 9 Feb 2007

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

Marco A. Espinosa-Vega

International Monetary Fund (IMF)

W. Scott Frame

Federal Reserve Bank of Dallas

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business

Date Written: July 2007

Abstract

An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature — that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory.

Keywords: collateral, asymmetric information, banks, small business, credit scoring

JEL Classification: G21, D82, G32, G38

Suggested Citation

Berger, Allen N. and Espinosa-Vega, Marco A. and Frame, W. Scott and Miller, Nathan, Why Do Borrowers Pledge Collateral? New Empirical Evidence on the Role of Asymmetric Information (July 2007). FRB of Atlanta Working Paper No. 2006-29a. Available at SSRN: https://ssrn.com/abstract=962415 or http://dx.doi.org/10.2139/ssrn.962415

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

Marco A. Espinosa-Vega

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8589 (Phone)
202-623-4311 (Fax)

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

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

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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