Working Paper: CEPR ID: DP17509
Authors: Steven Ongena; Walid Saffar; Yuan Sun; Lai Wei
Abstract: Does pledging movables as collateral alter corporate borrowing? To answer this question, we study the effect of collateral law reforms on syndicated bank loans granted across nine European countries that facilitated pledging movables between 1995 and 2019, comparing them to nineteen countries that did not. We find that although the reforms have enabled firms to issue more secured loans, the average cost of the loans and the number of covenants has also increased. Banks may demand more to compensate for both the potential wealth redistribution induced by newly issued secured credit and the extra monitoring involved to mitigate concerns about using movables as collateral.
Keywords: Cost of Debt; Collateral Laws; Access to Credit
JEL Codes: G30; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collateral law reforms (K29) | likelihood of secured loan issuances (G21) |
| Collateral law reforms (K29) | loan spreads (G51) |
| Collateral law reforms (K29) | annual interest expenditures (G12) |
| Collateral law reforms (K29) | borrowing costs for firms in sectors with high reliance on movable assets (G32) |
| Increased borrowing costs (G21) | banks anticipate wealth redistribution effects (G21) |
| Increased borrowing costs (G21) | additional monitoring costs for banks (G21) |
| Collateral law reforms (K29) | higher borrowing costs in firms with lower growth opportunities (G32) |
| Collateral law reforms (K29) | higher borrowing costs in countries with weaker legal environments (F65) |