Cross-ownership and collateral in lending

Xuesong Qian, Zifang Ding, Xiaping Cao and Shusen Qi

International Review of Financial Analysis, 2020, vol. 72, issue C

Abstract: Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.

Keywords: Information asymmetry; Intercorporate loans; Cross-ownership; Collateral (search for similar items in EconPapers)
JEL-codes: G20 G30 H81 L10 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302167

DOI: 10.1016/j.irfa.2020.101572

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