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Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield

Author

Listed:
  • Kose John

    (New York University)

  • Anthony W. Lynch

    (New York University and National Bureau of Economic Research)

  • Manju Puri

    (Stanford University and National Bureau of Economic Research)

Abstract

This article studies how collateral affects bond yields. Using a large data set of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claim holders explains this puzzling result by recognizing imperfections in the rating process. We test the model's implications. Consistent with our model and in results new to the literature, we find the yield differential between secured and unsecured debt, after controlling for credit rating, is larger for low credit rating, nonmortgage assets, longer maturity, and with proxies for lower levels of monitoring.

Suggested Citation

  • Kose John & Anthony W. Lynch & Manju Puri, 2003. "Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield," The Journal of Business, University of Chicago Press, vol. 76(3), pages 371-410, July.
    • Handle: RePEc:ucp:jnlbus:v:76:y:2003:i:3:p:371-410
    DOI: 10.1086/375252
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