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Bank Interest Margins And Business Start‐Up Collateral: Testing For Convexity

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  • Andrew Burke
  • Aoife Hanley

Abstract

The paper investigates the relationship between bank interest rate margins and collateral for loans issued to new ventures. The analysis finds a convex U‐shaped relationship. The results indicate that while provision of collateral initially reduces bank exposure to risk (through security, more optimal levels of capital and lower moral hazard among entrepreneurs) that beyond a point, the positive risk‐wealth association gives rise to greater risk taking propensity among entrepreneurs and ultimately higher interest rates. This indicates that a lender's pricing policy may even somewhat help to level the competitive playing field between ventures launched by higher and moderately wealthy entrepreneurs.

Suggested Citation

  • Andrew Burke & Aoife Hanley, 2006. "Bank Interest Margins And Business Start‐Up Collateral: Testing For Convexity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(3), pages 319-334, July.
    • Handle: RePEc:bla:scotjp:v:53:y:2006:i:3:p:319-334
    DOI: 10.1111/j.1467-9485.2006.00382.x
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    Cited by:

    1. André van Stel & Kashifa Suddle & Andrew Burke & Chantal Hartog, 2008. "How does Entrepreneurial Activity Affect the Supply of Business Angels?," Scales Research Reports H200813, EIM Business and Policy Research.
    2. Kaouther Jouaber & Meryem Mehri, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Post-Print hal-01525795, HAL.
    3. Andrew Burke & André Stel & Chantal Hartog & Abdel Ichou, 2014. "What determines the level of informal venture finance investment? Market clearing forces and gender effects," Small Business Economics, Springer, vol. 42(3), pages 467-484, March.
    4. Nabi, Mahmoud Sami & Suliman, Mohamed Osman, 2011. "Credit rationing, interest rates and capital accumulation," Economic Modelling, Elsevier, vol. 28(6), pages 2719-2729.
    5. repec:dau:papers:123456789/9551 is not listed on IDEAS
    6. Reabetswe Kgoroeadira & Andrew Burke & André Stel, 2019. "Small business online loan crowdfunding: who gets funded and what determines the rate of interest?," Small Business Economics, Springer, vol. 52(1), pages 67-87, January.
    7. Andrew Burke & Stuart Fraser & Francis J. Greene, 2010. "The Multiple Effects of Business Planning on New Venture Performance," Journal of Management Studies, Wiley Blackwell, vol. 47(3), pages 391-415, May.

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