Collateral, relationship lending and financial distress : an empirical study on financial contracting

This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lender
This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lenders, who enjoy an informational advantage over arm’s-length banks, are more senior to strengthen their bargaining power in future renegotiation if borrower’s face financial distress. This deters costly conflicts between lenders and fosters workout decisions by the best informed party. Consistent with our conjecture, we find that relationship lender in general have a higher probability to be collateralized, and a higher degree of collateralization (i.e. seniority). Furthermore, we show that seniority and the status of relationship lending increases the likelihood that a bank invests in a risky workout of distressed borrowers. Both findings support the view that collateral is a strategic instrument intended to influence the bargaining position of banks. Our result further suggest that seniority and relationship lending are complementary to each other. JEL Classification: G21
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Metadaten
Author:Ralf Elsas, Jan Pieter Krahnen
URN:urn:nbn:de:hebis:30-53001
Parent Title (German):CFS working paper series ; 2002, 17
Series (Serial Number):CFS working paper series (2002, 17)
Document Type:Working Paper
Language:English
Year of Completion:2002
Year of first Publication:2002
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2008/02/28
Tag:collateral; loan contract design; multiple lending; relationship lending,; workouts
SWD-Keyword:Darlehen; Sicherheit
Issue:December 23, 2002
Pagenumber:60
Note:
Erste Version unter dem Titel "Collateral, default risk, and relationship lending : an empirical study on financial contracting", 
1. version: March 12, 1999, current version: December 23, 2002
HeBIS PPN:195380789
Institutes:Wirtschaftswissenschaften
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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