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How Do Laws and Institutions Affect Recovery Rates for Collateral?

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Listed:
  • Hans Degryse
  • Vasso Ioannidou
  • José María Liberti
  • Jason Sturgess

Abstract

Using unique internal bank data on ex ante appraised liquidation and market values of assets pledged as collateral in sixteen countries, we show that laws and institutions that strengthen creditor protection increase expected recovery rates for collateral. Stronger creditor protection increases expected recovery rates for movable collateral relative to immovable collateral and shifts the composition of collateral toward movable assets, thereby increasing debt capacity through both higher loan-to-values and attenuating the creditor’s liquidation bias. Our results suggest that the recovery rate for collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency and enhance access to credit. Received September 17, 2018; editorial decision July 9, 2019 by Editor Andrew Ellul.

Suggested Citation

  • Hans Degryse & Vasso Ioannidou & José María Liberti & Jason Sturgess, 2020. "How Do Laws and Institutions Affect Recovery Rates for Collateral?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(1), pages 1-43.
    • Handle: RePEc:oup:rcorpf:v:9:y:2020:i:1:p:1-43.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfz011
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    3. Bellucci, Andrea & Borisov, Alexander & Giombini, Germana & Zazzaro, Alberto, 2021. "Estimating the relationship between collateral and interest rate: A comparison of methods," Finance Research Letters, Elsevier, vol. 43(C).
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    5. Barbiero, Francesca & Schepens, Glenn & Sigaux, Jean-David, 2022. "Liquidation value and loan pricing," Working Paper Series 2645, European Central Bank.
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    More about this item

    Keywords

    G2; G33; G38; K1;
    All these keywords.

    JEL classification:

    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • G2 - Financial Economics - - Financial Institutions and Services
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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