May 2011
Intermediate to advanced
502 pages
20h 1m
English
book
Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice
by H. Kent Baker, Gerald S. Martin
Content preview from Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice
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BANK RELATIONSHIPS AND COLLATERALIZATION 291
Collateral and Economic Development
Law and economics variables reflecting conditions in the economy and banking
system can also help explain differencesin the use of collateral internationally. Qian
and Strahan (2007) examine the features of loan contracts in 43 countries excluding
the United States and report that stronger creditor rights making collateral more
effectiveareassociated with greater use of collateral particularly for borrowers with
more tangible assets. Drawing on a unique dataset of loans from a multinational
bank (and thus holding lender effects constant), Liberti and Mian (2009) measure
the cost of collateral in different countries by the “collateral spread” defined to
capture the increased collateral required for high-risk loans over that for low-risk
loans. They find that the collateral spread is reduced for higher levels of financial
development. Further, the authors report that, in addition to offering lower levels of
collateral, riskier borrowers enjoy enhanced flexibility in being allowed to pledge
firm-specific rather than more general liquid assets.
SUMMARY AND CONCLUSIONS
This chapter provides a detailed survey of the literatureon bank relationships, bank
loans, and the role of collateral in bank loans. The discussion reveals that bank rela-
tionships are developed through the bank’s generation of proprietary information
about the borrower ...
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