Asymmetric Valuations and the Role of Collateral in Loan Agreements

Chan, Yuk-Shee; Kanatas, George

doi:10.2307/1992508

Cited by 372 publications

(237 citation statements)

References 8 publications

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“…These contract terms include outside collateral (Bester, 1985;Stiglitz and Weiss, 1986;Chan and Kanatas, 1985;Besanko and Thakor, 1987a,b;Boot, Thakor, and Udell, 1991;Berger and Udell, 1990), inside collateral (e.g., Smith and Warner, 1979;Stulz and Johnson, 1985;Swary and Udell, 1988;Gorton and Kahn, 1997;Welch, 1997;Klapper, 1998;John, Lynch, and Puri, 2003), personal guarantees (e.g., Avery et al, 1998;Berger and Udell, 1998;Lel and Udell, 2002), and forward commitments (Melnik and Plaut, 1986;Boot, Thakor, and Udell, 1987;Kanatas, 1987;Thakor and Udell, 1987;Sofianos, Wachtel and Melnik, 1990;Berkovitch and Greenbaum, 1991;Avery and Berger, 1991a;Berger and Udell, 1992;Morgan 1994Morgan , 1998.…”

Section: Iia the Literature On Relationship Lending And Competitionmentioning

confidence: 99%

Bank Market Power and SME Financing Constraints

2006

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Theoretical models of lending and industrial organization theory predict that firm access to credit depends critically on bank market structure. However, empirical studies offer mixed results. Some studies find that higher concentration is associated with higher credit availability consistent with the information hypothesis that less competitive banks have more incentive to invest in soft information. Other empirical studies, however, find support for the market power hypothesis that credit rationing is higher in less competitive bank markets. This study tests these two competing hypotheses by employing for the first time a competition indicator from the Industrial Organization literature -the Lerner index -as an alternative to traditional measures of concentration. We test the information and the market power hypotheses using alternative measures and firm borrowing constraints. We find that the results are sensitive to the choice between IO margins and traditional concentration measures. In particular, the HHI seems to support the information hypothesis while the Lerner index supports the market power hypothesis. The Lerner index, however, is found to be a more consistent indicator of market power across different measures of financing constraints. Moreover, the Lerner index is found to exhibit the larger marginal effect on the probability that a firm is financially constrained among a large set of firm level, bank market and environmental control variables. Our results are robust to alternative measures of financial constraints and cast doubt on the validity of relying on concentration measures as proxies of competition in corporate lending relationships (247 words).

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Section: Iia the Literature On Relationship Lending And Competitionmentioning

confidence: 99%

Bank Market Power and SME Financing Constraints

2006

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“…The recent literature on credit contracts with asymmetric information shows that this argument fails if the lender knows less than the borrower about the investment's riskiness. In credit markets with moral hazard or adverse selection outside collateral may serve as an incentive or screening device (see Besanko and Thakor (1987), Bester (1985Bester ( , 1987, and Chan and Kanatas (1985)). Outside collateral increases the punishment for default.…”

Section: Introductionmentioning

confidence: 99%

The Role of Collateral in a Model of Debt Renegotiation

Bester¹

1994

Journal of Money, Credit and Banking

191

124

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“…The 59 See Grunert et al (2002), p. 1057, where this relationship is verified for small and medium companies (SME). 60 See Bester (1985), Chan and Kanatas (1985) and Besanko and Thakor (1987). 61 This assumption is approved both by empirical analyses that detect a minor quality of the ratings of loans provided with collateral (see Orgler (1970), Hester (1979), Scott and Smith (1986)) and by those that verify a higher risk premium of collateralized loans (see Udell (1990, 1992), Booth (1992), Booth and Chua (1996), Angbazo et al (1998)).…”

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confidence: 99%