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Moral hazard and default risk of SMEs with collateralized loans

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  • Castillo, José A.
  • Mora-Valencia, Andrés
  • Perote, Javier

Abstract

This paper examines the failure of small- and medium-sized enterprises (SMEs) by considering both traditional financial ratios and other ratios proposed to capture ‘moral hazard effects’ in the presence of collateral, which lie in the principal-agent relationship between lender and borrower under conditions of asymmetric information. With a new Colombian database and by estimating default probability logit models, we measure the impact of these moral hazard effects on credit risk. We find that low effort and underinvestment variables have a significant impact on default risk and thus moral hazard has an effect on the failure of SMEs with collateralized obligations.

Suggested Citation

  • Castillo, José A. & Mora-Valencia, Andrés & Perote, Javier, 2018. "Moral hazard and default risk of SMEs with collateralized loans," Finance Research Letters, Elsevier, vol. 26(C), pages 95-99.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:95-99
    DOI: 10.1016/j.frl.2017.12.010
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    2. Shi, Baofeng & Zhao, Xue & Wu, Bi & Dong, Yizhe, 2019. "Credit rating and microfinance lending decisions based on loss given default (LGD)," Finance Research Letters, Elsevier, vol. 30(C), pages 124-129.
    3. Francesco Ciampi & Alessandro Giannozzi & Giacomo Marzi & Edward I. Altman, 2021. "Rethinking SME default prediction: a systematic literature review and future perspectives," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(3), pages 2141-2188, March.
    4. Jiang, Cuixia & Xiong, Wei & Xu, Qifa & Liu, Yezheng, 2021. "Predicting default of listed companies in mainland China via U-MIDAS Logit model with group lasso penalty," Finance Research Letters, Elsevier, vol. 38(C).
    5. Wang, Jinbo & Ran, Maosheng & Huang, Qing & Li, Wanli, 2022. "Nationalization of private enterprises and default risk: Evidence from mixed-ownership reform in China," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 534-553.
    6. Hossain, Monzur & Yoshino, Naoyuki & Taghizadeh-Hesary, Farhad, 2021. "Default risks, moral hazard and market-based solution: Evidence from renewable energy market in Bangladesh," Economic Modelling, Elsevier, vol. 95(C), pages 489-499.
    7. Mariya V. PODSHIVALOVA & Irina S. PYLAEVA & Nadehzda N. KUZMINA, 2019. "Evaluation of state support programs for small business: A regional aspect," Upravlenets, Ural State University of Economics, vol. 10(1), pages 28-39, March.
    8. Huong, Vu Van & Cuong, Ly Kim, 2019. "Does government support promote SME tax payments? New evidence from Vietnam," Finance Research Letters, Elsevier, vol. 31(C).

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    More about this item

    Keywords

    Default; Collateral; Moral hazard; Logit; SMEs;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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