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When Are Commercial Loans Secured?
Author(s) -
Gonas John S.,
Highfield Michael J.,
Mullineaux Donald J.
Publication year - 2004
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.0732-8516.2004.00068.x
Subject(s) - collateralization , collateral , collateralized debt obligation , loan , adverse selection , business , non performing loan , equity (law) , moral hazard , securitization , actuarial science , information asymmetry , financial system , monetary economics , finance , economics , incentive , microeconomics , political science , law
We analyze the factors that influence the decision to secure a commercial loan. We find evidence that variables reflecting adverse selection, moral hazard, and the prospects for default all affect the likelihood a loan will be collateralized. We find no evidence in favor of the predictions of certain theoretical models that high‐quality firms signal by providing collateral. Our results also show that lenders with less risk protection in the form of equity capital are more likely to require collateral, but that banks themselves are less likely to secure loans than nonbanks. Certain loan characteristics also influence the collateralization decision.