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Collateralization of business loans: Testing the prediction of theories

Antonio Meles, Claudio Porzio, Gabriele Sampagnaro, Maria Grazia Starita and Vincenzo Verdoliva

Research in International Business and Finance, 2017, vol. 42, issue C, 922-938

Abstract: Using confidential data on a large sample of relationship lending, we analyze the determining factors of the collateralization of business loans from banks, distinguishing between firms with observable risk and firms with hidden information. We achieve three main results. First, we provide evidence that observably riskier borrowers are encouraged to give more collateral to banks to obtain a loan, whereas firms with hidden information are less risky borrowers, offering collateral to signal their quality. Second, we show that relationship banking has a direct impact on the use of collateral and produces moderating effects on the other determining factors. Finally, we observe that distant bank branches—i.e., branches that encounter greater difficulties collecting soft information and obtaining site-specific data from headquarters—are more likely to require collateral than local bank branches.

Keywords: Collateralization; Relationship lending; Adverse selection; Moral hazard; Soft information (search for similar items in EconPapers)
JEL-codes: G21 E41 (search for similar items in EconPapers)
Date: 2017
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