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How Do Laws and Institutions affect Recovery Rates on Collateral?

Hans Degryse (), Vasso Ioannidou (), José María Liberti and Jason Sturgess ()
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José María Liberti: DePaul University

No 870, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: We show that laws and institutions that grant creditors stronger enforcement rights and bargaining power upon default increase expected recovery rates on collateral. Using unique data that provides ex-ante appraised liquidation values on secured loans for a single global bank, we estimate within-borrower effects of enforcement law on expected recovery rates. We show that movable collateral, which is less redeployable, susceptible to agency problems, and faster to depreciate, exhibits lower expected recovery rates that are more vulnerable to enforcement. Further, the bank compensates for lower expected recovery rates through higher interest rates. The results highlight that a lender’s expected recovery rate is a first stage mechanism through which stronger enforcement law affects loan-to-value ratios, lending decisions, and real outcomes.

JEL-codes: G2 G33 K4 (search for similar items in EconPapers)
Date: 2018-09-30
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Journal Article: How Do Laws and Institutions Affect Recovery Rates for Collateral? (2020) Downloads
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