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The Shadow Cost of Collateral

Author

Listed:
  • Guangqian Pan
  • Zheyao Pan
  • Kairong Xiao

Abstract

We quantify the cost of pledging collateral for small businesses by exploiting a regulatory quirk of the SBA disaster lending program in which firms are exempt from posting collateral if their loan size is below a threshold. Firms bunch their loans below the threshold, and the resultant distortion in the loan size distribution reveals the magnitude of the collateral cost. The collateral cost is substantial and varies across collateral types, business sectors, and collateral laws in ways consistent with flexibility-based theories. Our findings have implications for firms’ borrowing constraints and disaster lending program designs.

Suggested Citation

  • Guangqian Pan & Zheyao Pan & Kairong Xiao, 2025. "The Shadow Cost of Collateral," The Review of Financial Studies, Society for Financial Studies, vol. 38(5), pages 1419-1463.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:5:p:1419-1463.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae073
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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