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Cross-ownership and collateral in lending

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Listed:
  • Qian, Xuesong
  • Ding, Zifang
  • Cao, Xiaping
  • Qi, Shusen

Abstract

Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.

Suggested Citation

  • Qian, Xuesong & Ding, Zifang & Cao, Xiaping & Qi, Shusen, 2020. "Cross-ownership and collateral in lending," International Review of Financial Analysis, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302167
    DOI: 10.1016/j.irfa.2020.101572
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    Cited by:

    1. Ma, Jie & Wang, Leonard F.S. & Sun, Ji, 2022. "Cross Ownership, Loan Commitment, Managerial Delegation and the “Prisoner’s Dilemma”," MPRA Paper 115237, University Library of Munich, Germany, revised 02 Nov 2022.
    2. Zhang, Xuan & Zhang, Yongmin & Scheffel, Eric & Zhao, Yang, 2022. "A key driver for the mixed relationship between loan risk premiums and collateral: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Guo, Shen & Lin, Guiting & Ouyang, Alice Y., 2023. "Are pro-SME credit policies effective? Evidence from shadow banking in China," Economic Modelling, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Information asymmetry; Intercorporate loans; Cross-ownership; Collateral;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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