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Credit Ratings, Collateral and Loan Characteristics: Implications for Yield

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  • John, Kose

    (New York U)

  • Lynch, Anthony W.
  • Puri, Manju

    (Stanford U)

Abstract

This paper studies how collateral affects bond yields. Using a large dataset of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claimholders explains this puzzling result by recognizing imperfections in the rating process. We test the model's implications. Consistent with our model and in results new to the literature, we find the yield differential between secured and unsecured debt, after controlling for credit rating, is larger for low credit rating, nonmortgage assets, longer maturity and with proxies for lower levels of monitoring.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1748.

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Date of creation: Mar 2002
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Handle: RePEc:ecl:stabus:1748

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Postal: Stanford University, Stanford, CA 94305-5015
Phone: (650) 723-2146
Fax: (650)725-6750
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Web page: http://gsbapps.stanford.edu/researchpapers/
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  1. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-72, May.
  2. Chan, Yuk-Shee & Thakor, Anjan V, 1987. " Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-63, June.
  3. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September.
  4. Orgler, Yair E, 1970. "A Credit Scoring Model for Commercial Loans," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 435-45, November.
  5. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
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  7. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
  8. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  10. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  11. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
  12. James, Christopher, 1988. "The use of loan sales and standby letters of credit by commercial banks," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 395-422.
  13. Mark Carey & Mitch Post & Steven A. Sharpe, 1998. "Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting," Journal of Finance, American Finance Association, vol. 53(3), pages 845-878, 06.
  14. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  15. Klapper, Leora, 2001. "The uniqueness of short-term collateralization," Policy Research Working Paper Series 2544, The World Bank.
  16. Booth, James R., 1992. "Contract costs, bank loans, and the cross-monitoring hypothesis," Journal of Financial Economics, Elsevier, vol. 31(1), pages 25-41.
  17. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
  18. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
  19. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  20. Harhoff, Dietmar & Korting, Timm, 1998. "Lending relationships in Germany - Empirical evidence from survey data," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1317-1353, October.
  21. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
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