Tests of Ex Ante Versus Ex Post Theories of Collateral Using Private and Public Information

European Banking Center Discussion Paper No. 2010-01

CentER Discussion Paper Series No. 2010-13

29 Pages Posted: 19 Feb 2010

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

W. Scott Frame

Structured Finance Association

Vasso Ioannidou

Bayes Business School (formerly Cass); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2009

Abstract

Collateral is a widely used, but not well understood, debt contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also includes public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant, although the ex ante theories are also valid for customers with short borrower-lender relationships that are relatively unknown to the lender.

Keywords: Collateral, Asymmetric Information, Banks

JEL Classification: G21, D82, G38

Suggested Citation

Berger, Allen N. and Frame, W. Scott and Ioannidou, Vasso, Tests of Ex Ante Versus Ex Post Theories of Collateral Using Private and Public Information (December 31, 2009). European Banking Center Discussion Paper No. 2010-01, CentER Discussion Paper Series No. 2010-13, Available at SSRN: https://ssrn.com/abstract=1554355 or http://dx.doi.org/10.2139/ssrn.1554355

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

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803-576-8440 (Phone)
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W. Scott Frame

Structured Finance Association ( email )

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Vasso Ioannidou

Bayes Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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