The Shadow Cost of Collateral

Guangqian Pan, Zheyao Pan and Kairong Xiao

The Review of Financial Studies, 2025, vol. 38, issue 5, 1419-1463

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.

JEL-codes: E44 E51 G21 G23 (search for similar items in EconPapers)
Date: 2025
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