The Incidence of Secured Debt: Evidence from the Small Business Community

Leeth, John D.; Scott, Jonathan

doi:10.2307/2330818

Cited by 181 publications

(137 citation statements)

References 20 publications

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“…Moreover, the speed required to substitute assets would raise costs for the debtor. Consequently, short-term loans will rely less on collateral provision (Leeth and Scott, 1989). In contrast, Stulz and Johnson (1985) argue the opposite.…”

Section: Loan Characteristicsmentioning

confidence: 98%

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Business collateral and personal commitments in SME lending

Voordeckers

Steijvers

2006

Journal of Banking & Finance

148

103

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Using a database of SME credit approvals from a large Belgian bank, this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral/commitments. Our results suggest that firm and relationship characteristics seem to be more important determinants of collateral/commitment protection than loan and lender characteristics. Family firms are more likely to offer a higher degree of collateral/commitment protection while introducing competition between banks decreases this likelihood. The collateral requirement decreases in the length of the bank-borrower relationship. Furthermore, trade credit seems to have a signalling effect. The 'lazy banks hypothesis' was not supported. Our results suggest that beside risk arguments, also commercial arguments help explain the pledging of collateral. Using a continuation-ratio logit model, we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral/commitments. JEL classification: M13; G21; G30; G32; C35Keywords: SME lending, business collateral, personal collateral, personal guarantees. Business collateral and personal commitments in SME lending. AbstractUsing a database of SME credit approvals from a large Belgian bank, this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral/commitments. Our results suggest that firm and relationship characteristics seem to be more important determinants of collateral/commitment protection than loan and lender characteristics. Family firms are more likely to offer a higher degree of collateral/commitment protection while introducing competition between banks decreases this likelihood. The collateral requirement decreases in the length of the bank-borrower relationship. Furthermore, trade credit seems to have a signalling effect. The 'lazy banks hypothesis' was not supported. Our results suggest that beside risk arguments, also commercial arguments help explain the pledging of collateral. Using a continuation-ratio logit model, we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral/commitments. JEL classification: M13; G21; G30; G32; C35

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Section: Loan Characteristicsmentioning

confidence: 98%

“…The empirical literature (Leeth and Scott, 1989;Ang et al, 1995;Avery et al, 1998;Harhoff and Körting, 1998;Degryse and Van Cayseele, 2000;Hanley, 2002) concerning the determinants of collateral is rather scant, partly due to data limitations.…”

Section: Introductionmentioning

confidence: 99%

Business collateral and personal commitments in SME lending

Voordeckers

Steijvers

2006

Journal of Banking & Finance

148

103

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“…Large loans are usually secured because of the high-risk perception (Godlewski, Weill 2011). Moreover, a large loan increases the leverage of a firm and may increase the likelihood of default (Leeth, Scott 1989;Avery et al 1998). Hence, it is important for banks to secure loans by asking for collateral from borrowers (Degryse, Van Cayseele 2000).…”

Section: Loan Characteristicsmentioning

confidence: 99%

“…Collateral requirements on loan contracts and the observed risk hypothesis have also received utmost attention from researchers. However, these studies are concentrated on a single country and dominated by the US market (Leeth, Scott 1989;Berger, Udell 1990Brick, Palia 2007;Han et al 2009;Berger et al 2011), with a handful concentrated on the European market (Cowling 1999 -UK;Jimenez, Saurina 2004 -Spain;HernandezCanovas, Martinez-Solano 2006 -Spain;Duarte et al 2016 -Portugal). There are studies based on cross-country analyses but they cover both developing and developed markets (Godlewski, Weill 2011;Duarte et al 2017).…”

Section: Introductionmentioning

confidence: 99%

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

Rahman

Belás

Klieštik

et al. 2017

Journal of Business Economics and Management

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Abstract. The purpose of this paper is to examine the determinants of collateral for small and medium enterprises (SMEs) in the context of Visegrad countries: Czech Republic, Slovak Republic, Hungary and Poland. The data set for this paper was obtained from the Business Environment and Enterprise Performance Survey (BEEPS), which was conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD) from 2012-2014. A binary logistic regression model with different specifications was employed to examine the effect of independent variables on the incidence of collateral. The results show that risky borrowers need to pledge collateral and the reduction of asymmetric information can lower the incidence of collateral for SMEs. Moreover, we find that female borrowers are more likely to pledge collateral than male borrowers are. The results also suggest that loans with a longer maturity are more likely to be collateralized than short-term loans. We find evidence that bank-borrower proximity can alleviate the incidence of collateral whereas bank concentration may increase collateral requirements. Policy makers may consider these results to implement policies that can promote bank competition and can lower collateral requirements for female borrowers. The paper contributes to the ongoing debate on the determinants of collateral.

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“…The private-information models suggest that borrowers with low unobservable risk may signal this through the pledging of collateral. The private-information models do not have a prediction regarding the relationship between observed risk and collateral, though the empirical literature finds that collateral is associated with higher risk (e.g., Leeth and Scott 1989, Berger and Udell 1990, 1995, Booth 7 1992, Degryse and Van Cayseele 2000, Ono and Uesegi 2005. Some of these studies find that collateral is positively related to risk premiums among small business loans (e.g., Berger and Udell 1990, Degryse and Van Cayseele 2000).…”

Section: Empirical Literature Reviewmentioning

confidence: 99%

Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information

Berger¹,

Espinosa‐Vega²,

Frame³

et al. 2011

Journal of Financial Intermediation

177

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature-that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory. Terms of use: Documents inJEL classification: G21, D82, G32, G38

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The Incidence of Secured Debt: Evidence from the Small Business Community

Cited by 181 publications

References 20 publications

Business collateral and personal commitments in SME lending

Business collateral and personal commitments in SME lending

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information

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