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Collaterals, Bank Monitoring and Performance: the Case of Newly Established Wine Farmers

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  • Cadot, Julien
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    Abstract

    This research aims at identifying the incentives associated to collaterals in an asymmetric information context and when the bank is the main financial partner of the entrepreneurs, which is typically the case for most farms and especially in the wine sector. In one hand, collaterals may reduce the risk of overinvestment by entrepreneurs and so reduce the risk of repayment default. In the other hand, to contract collaterals may lead the bank to reduce the monitoring effort. In this paper we test these two hypotheses in taking into account the fact that entrepreneurs can benefit from a banking relationship or not. Our results confirm that collaterals’ incentives depend on the bank monitoring. Moreover, this emphasizes the uniqueness of land mortgages. Besides, our results confirm that the revenue constraint is binding and thus, make critical the question of financial resources for newly established wine farmers.

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    Bibliographic Info

    Paper provided by Agricultural and Applied Economics Association in its series 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania with number 103414.

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    Date of creation: 2011
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    Handle: RePEc:ags:aaea11:103414

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    Related research

    Keywords: Collaterals; incentives; bank monitoring; Agricultural Finance; G32; G33; G35;

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    1. Hans Degryse & Partick Van cayseele, 1998. "Relationship Lending within a Bank-based System: Evidence from European Small Business Data," Center for Economic Studies - Discussion papers ces9816, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    2. Gloy, Brent A. & Gunderson, Michael A. & LaDue, Eddy L., 2004. "The Costs and Returns of Agricultural Credit Delivery," Working Papers 127134, Cornell University, Department of Applied Economics and Management.
    3. Masaji Kano & Hirofumi Uchida & Gregory F. Udell & Wako Watanabe, 2006. "Information Verifiability, Bank Organization, Bank Competition and Bank-Borrower Relationships," Discussion papers 06003, Research Institute of Economy, Trade and Industry (RIETI).
    4. Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
    5. Arito Ono & Iichiro Uesugi, 2005. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market," Discussion papers 05027, Research Institute of Economy, Trade and Industry (RIETI).
    6. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
    7. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
    8. Barry, Peter J. & Robison, Lindon J., 2001. "Agricultural finance: Credit, credit constraints, and consequences," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 10, pages 513-571 Elsevier.
    9. Allen N. Berger & Marco A. Espinosa-Vega & W. Scott Frame & Nathan H. Miller, 2004. "Debt maturity, risk, and asymmetric information," Finance and Economics Discussion Series 2004-60, Board of Governors of the Federal Reserve System (U.S.).
    10. Chakraborty, Atreya & Hu, Charles X., 2006. "Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 86-107, January.
    11. ONO Arito & SAKAI Koji & UESUGI Iichiro, 2008. "The Effects of Collateral on SME Performance in Japan," Discussion papers 08037, Research Institute of Economy, Trade and Industry (RIETI).
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