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Endogeneity Issues in the Empirical Assessment of the Determinants of Loan Renegotiation

Author

Listed:
  • José Valente

    (Faculdade de Economia, Universidade de Coimbra Banco do Nordeste do Brasil)

  • José Murteira

    (CeBER, Faculdade de Economia, Universidade de Coimbra, and CEMAPRE)

  • Mário Augusto

    (CeBER, Faculdade de Economia, Universidade de Coimbra)

Abstract

The present text is focused on the evaluation of the influence that determinants of loan contracts’ design may have on loan renegotiation. This general purpose is faced with the possible simultaneity of determination of some such factors (namely the use of collaterals and loan interest rate) and the likelihood of contract renegotiation. Naturally, this simultaneity corresponds to an issue of endogeneity of these factors within econometric models of the conditional probability of renegotiation. If neglected, covariates’ endogeneity causes model misspecification, translating into unreliable empirical assessments of the marginal effects of all renegotiation determinants on the probability of loan redesign. Building on the theory of incomplete contracts, suggesting that the possibility of contract renegotiation is already anticipated at the contracting date, the empirical findings of the paper, based on a dataset provided by a Brazilian bank, provide strong indication that this can indeed be the case. Accordingly, the empirical assessment of the marginal contributions of important variables to the likelihood of renegotiation is revisited, thereby enabling a deeper understanding of renegotiation processes.

Suggested Citation

  • José Valente & José Murteira & Mário Augusto, 2018. "Endogeneity Issues in the Empirical Assessment of the Determinants of Loan Renegotiation," CeBER Working Papers 2018-15, Centre for Business and Economics Research (CeBER), University of Coimbra.
    • Handle: RePEc:gmf:papers:2018-15
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    File URL: https://www.uc.pt/en/uid/ceber/WorkingPapers/wp/wp_2018/wpdecimoquinto
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    Cited by:

    1. Thiago Trafane Oliveira Santos, 2021. "High Lending Interest Rates in Brazil: cost or concentration?," Working Papers Series 550, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    Loan renegotiation; Contracting costs; Incomplete contracts; Asymmetric information; Endogeneity.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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