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Bank Competition and Collateral: Theory and Evidence

Listed author(s):
  • Christa Hainz

    ()

  • Laurent Weill

    ()

  • Christophe Godlewski

    ()

We investigate the impact of bank competition on the use of collateral in loan contracts. We analyze asymmetric information about the borrowers’ type in a Salop model in which banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks. Copyright Springer Science+Business Media, LLC 2013

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File URL: http://hdl.handle.net/10.1007/s10693-012-0141-3
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Article provided by Springer & Western Finance Association in its journal Journal of Financial Services Research.

Volume (Year): 44 (2013)
Issue (Month): 2 (October)
Pages: 131-148

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Handle: RePEc:kap:jfsres:v:44:y:2013:i:2:p:131-148
DOI: 10.1007/s10693-012-0141-3
Contact details of provider: Web page: http://www.springer.com

Web page: http://westernfinance.org/

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Order Information: Web: http://www.springer.com/journal/10693

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