 On stock-based loansThomas A. McWalter and Peter H. Ritchken Journal of Financial Intermediation, 2022, vol. 52, issue C Abstract: We investigate the equilibrium interest rate charges on non-recourse and recourse loans secured by stock. In such loans, the client retains the option to prepay and recover the collateral stock. We adopt a structural model of the firm where debt levels, with endogenous bankruptcy, affect equity dynamics. Complicating matters, the link between total equity and the price of a share of stock that forms the collateral depends on the extent of dilutions and buybacks that occur. For levered firms, due to dilution in bad states of nature, stock prices typically fall faster than equity values; and for firms that engage in buybacks in good states of nature, stock prices will rise faster than equity values. Banks that ignore these features underestimate the equilibrium interest rate charge on stock-based loans. We provide an analysis of individual stock-based loans and their portfolio characteristics, the latter of which can be used by banks to ascertain capital requirements. Keywords: Stock-based loans; Margin loans; Structural models; Payout policy; Buybacks; Dilution (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:52:y:2022:i:c:s1042957322000444 DOI: 10.1016/j.jfi.2022.100991 Access Statistics for this article Journal of Financial Intermediation is currently edited by Elu von Thadden More articles in Journal of Financial Intermediation from Elsevier |
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