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Loan Collateral Decisions and Corporate Borrowing Costs

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  • Booth, James R.
  • Booth, Lena Chua
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    Abstract

    We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

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    File URL: http://dx.doi.org/10.1353/mcb.2006.0011
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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 38 (2006)
    Issue (Month): 1 (February)
    Pages: 67-90

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    Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:67-90

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Hainz, Christa, 2008. "Bank Competition - When is it Good?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 244, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Han, Liang & Fraser, Stuart & Storey, David J., 2009. "Are good or bad borrowers discouraged from applying for loans? Evidence from US small business credit markets," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 415-424, February.
    3. Régis Blazy & Laurent Weill, 2006. "Why Do Banks Ask for Collateral and Which Ones?," LSF Research Working Paper Series 06-07, Luxembourg School of Finance, University of Luxembourg.
    4. Kano, Masaji & Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2011. "Information verifiability, bank organization, bank competition and bank-borrower relationships," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 935-954, April.
    5. Meneghetti, Costanza, 2012. "Managerial Incentives and the Choice between Public and Bank Debt," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 65-91.
    6. Wang, Yu-Lin, 2010. "Does collateral cause inefficient resource allocation?," Journal of Economics and Business, Elsevier, vol. 62(3), pages 220-233, May.
    7. Neus, Werner & Stadler, Manfred, 2011. "Risk and the role of collateral in debt renegotiation," University of Tuebingen Working Papers in Economics and Finance 16, University of Tuebingen, Faculty of Economics and Social Sciences.
    8. Nandy, Debarshi K., 2010. "Why do firms denominate bank loans in foreign currencies? Empirical evidence from Canada and U.K," Journal of Economics and Business, Elsevier, vol. 62(6), pages 577-603, November.
    9. Kenneth Daniels & Gabriel Ramirez, 2008. "Information, Credit Risk, Lender Specialization and Loan Pricing: Evidence from the DIP Financing Market," Journal of Financial Services Research, Springer, vol. 34(1), pages 35-59, August.
    10. Ioana-Maria Dragu & Adriana Tiron Tudor, 2011. "Developing An Econometric Model For Measuring The Evolution Of Information Disclosure - Ias 23 Borrowing Costs -," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 8.
    11. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester.
    12. Amedeo Argentiero, 2009. "Some New Evidence on the Role of Collateral: Lazy Banks or Diligent Banks?," ISAE Working Papers 113, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    13. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.

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