Further Evidence on the Determinants of Secured versus Unsecured Loans

Abstract

Using a unique data set collected from financial statements of all Singapore listed firms from 1983 to 1991, we provide international evidence on the determinants of the amount of secured loans as a fraction of total secured and unsecured loans. This data set comprises a much wider range of firms than most previous studies. We show that consistent with the agency-cost hypothesis, firms with more growth opportunities use more secured loans. This is in contrast to the opposite result reported in Barclay and Smith (1995b) who measure secured debt as a fraction of total long-term fixed claims. We also find strong support for the hypothesis that smaller firms use more secured loans. In contrast, Leeth and Scott (1989), using survey data on small firms, find an insignificant firm size effect. Finally, we show that the use of secured loans is positively related to asset riskiness and loan size, and is negatively related to asset specificity. Firm quality has no explanatory power. Copyright Blackwell Publishers Ltd 1998.

Ownership structure and collateral requirements: Evidence from China's listed firms

“…In the empirical analysis we use the percentage of total loans that were collateralized at the firm-year level as a proxy for total collateral requirements and control for variables that were identified by the current literature in empirical corporate finance (e.g., Allen & Li, 2011;Chen, Yeo, & Ho, 1998;Jimenez, Salas, & Saurina, 2009;Jimenez et al, 2006;Menkhoff et al, 2006Menkhoff et al, , 2012. Our measures of the fraction of collateralized loans at the firm-year level are, by definition, censored, ranging between zero and one.…”

“…Smaller firms, with less information available to lenders, may also use more secured debt to signal their quality (Chan & Kanatas, 1985). However, both Leeth and Scott (1989) and Chen et al (1998) argue that larger firms (which therefore borrow more) will find it more economical to use security, because the fixed monitoring and administrative costs associated with secured loans fall on a per unit basis as the total amount of loan financing rises. Therefore, the use of collateral is expected to increase with the size of the loan.…”

“…5 The same approach has been used by Hulburt & Scherr (2003) and Allen and Li (2011). 6 An alternative approach is to employ a measure of firm size to capture the former and a measure of total dollar borrowings to capture the latter (as in Chen et al, 1998). Unfortunately, this approach may give rise to substantial multi-colinearity problems as the two measures are highly correlated in our samples.…”

The Cascade Effect on Lending Conditions: Evidence from the Syndicated Loan Market

“…The loan spreads on secured/guaranteed loans are significantly higher than those on unsecured/non-guaranteed loans. This result seems to support the "observed-risk hypothesis" -banks charge riskier borrowers larger loan spreads and require more collateral (see, for example, Berger and Udell, 1990;Chen et al, 1998;and Godlewski and Weill, 2011). The coefficient of the "missing" variable is positive and significant, which indicates that we may have underestimated the coefficient of Secured/Guaranteed, because we treat the missing value as unsecured or non-guaranteed.…”

On the Design of Efficient Priority Rules for Secured Creditors: Empirical Evidence from A Change in Law

“…The debate lacks empirical data about the effects of different priority rules or the effects of secured creditor incentives on insolvency proceedings (Harris and Mooney, 1997;Warren, 1997;Leeth and Scott, 1989;Barclay and Smith, Jr., 1995;Chen, Yeo and Ho, 1998;Mann, 1997a, b). Debate in the United States also ignores experience in other countries.…”