Screening good borrowers: Evidence from the small business community

Irene Comeig, Esther Del Brio () and Matilde O. Fern ndez ()
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Matilde O. Fern ndez: Departamento de Finanzas Empresariales, Universidad de Valencia, http://centros.uv.es/web/departamentos/D172/castellano/
Authors registered in the RePEc Author Service: Matilde O. Fernandez-Blanco

No 2010-06, Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". from Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España).

Abstract: The current collapse of credit markets has left small and medium enterprises (SMEs) facing severe credit rationing. The practice of screening borrowers by risk level has become a paramount consideration for both lenders and firms. This paper represents the first empirical test of the screening role of loan contracts that consider collateral-interest margins simultaneously. For our empirical analysis, we use a unique data set composed of bank loans granted by 28 Spanish banks to SMEs. Our results suggest that by combining collateral appropriately with interest rate, borrowers with different risk levels are separated: high-risk borrowers accept loans without collateral and with high interest rates, whereas low-risk borrowers accept loans with real estate collateral and with low interest rates. Hence, we provide the first empirical evidence of the effectiveness of collateral as a screening mechanism, when it is adequately combined with interest rates

Keywords: Asymmetric Information; Collateral; Credit Risk; Incentive-Compatible Contracts; Screening Mechanisms (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 L26 (search for similar items in EconPapers)
Pages: 14 pages
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