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Loan Collateral Decisions and Corporate Borrowing Costs

Author

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  • Booth, James R.
  • Booth, Lena Chua

Abstract

We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

Suggested Citation

  • Booth, James R. & Booth, Lena Chua, 2006. "Loan Collateral Decisions and Corporate Borrowing Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 67-90, February.
  • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:67-90
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    File URL: http://dx.doi.org/10.1353/mcb.2006.0011
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    Citations

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    Cited by:

    1. Liang Han & Stuart Fraser & David J. Storey, 2009. "The Role of Collateral in Entrepreneurial Finance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 424-455.
    2. Hainz, Christa & Dinh, Thanh & Kleimeier, Stefanie, 2011. "Collateral and its Determinants: Evidence from Vietnam," Proceedings of the German Development Economics Conference, Berlin 2011 36, Verein für Socialpolitik, Research Committee Development Economics.
    3. Hainz, Christa, 2008. "Bank Competition - When is it Good?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 244, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Ioana-Maria Dragu & Adriana Tiron Tudor, 2011. "Developing An Econometric Model For Measuring The Evolution Of Information Disclosure - Ias 23 Borrowing Costs -," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-8.
    5. Kano, Masaji & Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2011. "Information verifiability, bank organization, bank competition and bank-borrower relationships," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 935-954, April.
    6. repec:fip:fedlrv:00094 is not listed on IDEAS
    7. Werner Neus & Manfred Stadler, 2013. "Risk and the Role of Collateral in Debt Renegotiation," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(3), pages 273-284, November.
    8. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester.
    9. Kenneth Daniels & Gabriel Ramirez, 2008. "Information, Credit Risk, Lender Specialization and Loan Pricing: Evidence from the DIP Financing Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(1), pages 35-59, August.
    10. Régis Blazy & Laurent Weill, 2006. "Why Do Banks Ask for Collateral and Which Ones?," LSF Research Working Paper Series 06-07, Luxembourg School of Finance, University of Luxembourg.
    11. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.
    12. Yuting Li & Tong Chen & Baogui Xin, 2016. "Optimal Financing Decisions of Two Cash-Constrained Supply Chains with Complementary Products," Sustainability, MDPI, Open Access Journal, vol. 8(5), pages 1-17, April.
    13. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    14. Han, Liang & Fraser, Stuart & Storey, David J., 2009. "Are good or bad borrowers discouraged from applying for loans? Evidence from US small business credit markets," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 415-424, February.
    15. repec:eee:ememar:v:33:y:2017:i:c:p:19-41 is not listed on IDEAS
    16. Wang, Yu-Lin, 2010. "Does collateral cause inefficient resource allocation?," Journal of Economics and Business, Elsevier, vol. 62(3), pages 220-233, May.
    17. repec:gam:jsusta:v:8:y:2016:i:5:p:429:d:69266 is not listed on IDEAS
    18. Karapetyan, Artashes & Stacescu, Bogdan, 2014. "Does information sharing reduce the role of collateral as a screening device?," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 48-57.
    19. Amedeo Argentiero, 2009. "Some New Evidence on the Role of Collateral: Lazy Banks or Diligent Banks?," ISAE Working Papers 113, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    20. Nandy, Debarshi K., 2010. "Why do firms denominate bank loans in foreign currencies? Empirical evidence from Canada and U.K," Journal of Economics and Business, Elsevier, vol. 62(6), pages 577-603, November.
    21. Meneghetti, Costanza, 2012. "Managerial Incentives and the Choice between Public and Bank Debt," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 65-91.

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